The greenback continues to be in the spotlight as important economic indicators and ongoing trade negotiations crystalize its path moving forward. This creates a really positive narrative about a labor market that is remaining remarkably resilient. Analysts are keenly awaiting the next Nonfarm Payrolls, second quarter GDP figures and ISM’s manufacturing gauge as they determine what fate awaits the currency. Simultaneously, fiscal worries over Donald Trump’s “Big and Beautiful Bill” promise to compound headwinds for the dollar.
All that changed dramatically in recent weeks with the big trade news. President Joe Biden has inexplicably continued the same tariffs. He has introduced tariffs, further muddying the economic waters between the United States and its import partners. The European Commission has all but ruled out alternatives and insisted that a negotiated solution with the US is “very much within reach.” Simultaneously, they have authorized retaliation tariffs on €93 billion of US imports.
Economic Indicators and Labour Market Focus
Next week is critical for the US dollar. A series of important US economic data is scheduled to be reported next week. As always the Nonfarm Payrolls report, the best gauge for how many new jobs are being created in the economy, will be the most watched. Such strong job growth would likely reaffirm confidence in the dollar’s strength, analysts predict.
Moreover, the recently released second-quarter GDP figures will help inform our assessment of economic performance. This is the kind of positive GDP growth surprise that will tend to boost the dollar. It suggests the underlying economy continues to be resilient—even with continuing, unresolved trade tensions. Analysts will be tracking the ISM’s manufacturing gauge like hawks. This lagging indicator is important to gauge the health of the manufacturing sector and create positive market expectations for future economic activity.
The Federal Reserve is the star of the show next week. The Fed’s next meeting is still very likely to maintain borrowing costs where they’ve been for the last four meetings (five months). This long-term period of relative rate stability might play a role in a dovish dollar view.
Trade Tensions and Budget Concerns
Trade negotiations have been a rollercoaster ride, with significant developments impacting the US dollar’s valuation. Donald Trump’s “Big and Beautiful Bill” has already raised the budget alarm among economists and policy-wonkish types. Because the implementation of this bill will tax fiscal resources, it will inevitably increase volatility in the currency market.
Trump’s personal advocacy has gone a long way in promoting a maximalist and aggressive approach on trade. Last week, he conceded that there is now “probably a 50‑50 chance—or less” of getting a trade deal with the European Union. That uncertainty about what any potential deal would be can be a significant drag on the market sentiment toward the dollar.
The US–China trade war began in 2018 as Donald Trump initiated a series of tariffs on Chinese imports. Yet it goes on and on, without end in sight. The Phase One trade deal, signed in January 2020, was supposed to lay a transparent groundwork for structural reforms to China’s mercantilist economic regime. It has failed to yield much meaningful advancement to date. Trump’s stance has led to a backdrop of heightened trade tensions that complicate predictions about the dollar’s performance.
Recent Developments in Trade Relations
Even with these challenges, there have been encouraging signs of progress for U.S.-China trade relations. Those improvements may offer a rare piece of good news for the US dollar. A recently announced trade deal between the US and Japan has raised hopes by the market players. This agreement is a major step towards improving the efficiency of trade flow thereby generating much more favorable conditions for the dollar.
This selection is the European Commission’s second approval of counter-tariffs, now covering €93 billion in US goods. This decision underscores the persistent trade friction between the US and its trading partners. The interaction between these two dynamics creates an air of unpredictability that would be damaging to both market confidence and the dollar’s exchange rate value.
Market participants are watching these changes intently. They know that a newly minted, slightly less valiant US dollar would go a ways toward rebalancing the trade deficit. The resulting lower dollar value would make US exports more competitive internationally, helping to reduce the overall deficit in the medium-to-long term.