Clarity on the depth and effectiveness of any potential negotiations remains suspects after the initial London talks which have only contributed more significant uncertainty to US-China relations. An official White House announcement indeed confirmed the forthcoming meeting, but many crucial issues are still left unaddressed, especially China’s reluctance to discuss its own trade surplus. Analysts note that this refusal may empower trade hawks in Washington, who advocate for maintaining a tough approach against China.
Negotiators from both nations have established a framework to restart the flow of sensitive goods, including rare earth elements, which are crucial for various industries. The absence of Beijing’s commitment to making China start lowering its trade deficit makes these talks a farce. This ultimately created an atmosphere of mistrust in financial markets regarding the possible results of the negotiations.
The dollar’s performance reflects this unease. We wrote in a recent report that domestic fiscal developments have played a big role in the dollar’s strength. The weak 3-year Treasury auction sent US government bonds sharply lower, reversing some recent gains. Looking ahead, today’s market focus shifts to the very much awaited 10-year auction and CPI data. May’s core inflation is forecast at a modest 0.2%. This forecast is a tick below the 0.3% consensus and should help take some pressure off Treasuries, but it would likely weaken the dollar as September rate cut chances recede.
“Domestic fiscal developments have also weighed on the dollar. A soft 3-year Treasury auction reversed some recent gains in US government bonds, which now face a dual test today with the highly watched 10-year auction and CPI data.”
Market reactions to the London summit show blowing bubbles. The dollar was strong at the beginning of this week. It found it difficult to hold on to the strength following the announcement of the US-China meeting. Analysts believe that the dollar is still 3-4% undervalued against major G10 peers. On top of all that, US equity futures point to a soft opening today, after a low volume modestly positive day yesterday.
“Markets are treating the London summit with some scepticism. The dollar remains one of the best gauges of trade sentiment.”
Dollar bears are out in force, with analysts lining up to bear the news of a dollar crash. They cite a number of reasons including expected CPI outcomes, speculation around Federal Reserve leadership transitions. Rumors have been circulating lately that Treasury Secretary Scott Bessent is in the running to succeed Jerome Powell at the Fed. Each of these developments has the potential to undermine the dollar. Among other things, the conservative Bessent would be expected to advocate for lower interest rates – as Trump did in the early days of his administration.
“Our bias is bearish on the dollar today – not just because of our core CPI call, but also amid reports that Treasury Secretary Scott Bessent is being considered as Powell’s Fed successor.”
This convergence of factors is making for an increasingly tricky landscape for investors and – especially – policymakers to navigate. We will be watching the trade talks going on between the US and China as this develops in London. The stakes are especially high for fragile global supply chains and multifactor productivity growth.