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After a strong run through early 2024, the US dollar is starting to show signs of fatigue and this time, it's not just about yields. Over the past week, the greenback has edged lower toward key technical support levels, with the DXY drifting back to its April lows. At the heart of the move is growing discomfort around US trade policy specifically, the return of tariff escalation under Donald Trump’s second-term agenda.
Markets had been cautiously optimistic in May, buoyed by hopes of de-escalation in the US-China trade standoff. But that narrative is quickly unravelling. Trump’s latest decision to double tariffs on steel and aluminium imports to 50%, effective from today (June 4), has rattled risk sentiment and reminded investors just how unpredictable the US policy landscape can be. Trade talks with Beijing have reportedly stalled again, and the lack of any meaningful progress has reintroduced uncertainty at a time when the global cycle is already under pressure.
China’s economy is showing the strain. The latest Caixin manufacturing PMI fell sharply in May, dropping to 48.3 its lowest level since September 2022. The report blamed deteriorating external demand and mounting pressure on supply chains. In contrast, China’s official PMI showed a modest improvement. But that divergence likely reflects the different timing of the surveys one capturing the immediate shock of tariffs, the other picking up a more lagged sentiment bounce after the temporary US-China trade truce earlier in May.
Caixin Manufacturing PMI
Back in the US, the ISM manufacturing survey also disappointed. It slipped to 48.5 in May, the fourth consecutive decline, pointing to a cooling in business confidence. After a solid rebound late last year, momentum is now fading again undermined by cost uncertainty, slower hiring, and global demand softening. While some macro data has held up reasonably well (surprise indices have even flipped back into positive territory), traders are becoming more selective in pricing further Fed rate cuts.
At one point, markets were pricing in 75bps of easing this year. That’s now been trimmed to around 50bps, reflecting a Fed that’s cautious but not panicking. A decisive shift in expectations would likely require a material weakening in the labour market. This makes the upcoming US nonfarm payrolls report a critical data point consensus is looking for a softer 130k print for May, which would be below trend but not weak enough to force the Fed’s hand before September.
So, we find ourselves in an awkward middle ground: softer growth data but not a full breakdown, Trump reintroducing tariff risk, and a Fed that’s still playing the long game. This mix is proving toxic for the dollar especially against currencies like the yen.
Japan: Quiet Strength Behind the Yen’s Comeback
After slipping to 146.28 last week, USD/JPY has now dropped back to the 142 handles. And it’s not just a dollar story. Japanese government bond (JGB) yields remain firm, especially at the long end. The 30-year yield is consolidating just below 3%, and recent auctions are pointing to healthy domestic demand. In fact, the latest 10-year JGB auction saw a bid-to-cover ratio jump to 3.66 well above its one-year average. That tells us investors are still willing to hold duration, even with rising yield risk globally.
There’s also growing speculation that the Ministry of Finance could tweak its issuance strategy. A recent survey sent to market participants asked for feedback on current issuance conditions a sign that Tokyo is open to changes as it tries to manage both fiscal goals and bond market stability. Meanwhile, the government has pushed back its primary surplus target to 2025 or even 2026, suggesting that fiscal consolidation may take a backseat to growth management.
On the monetary side, BoJ Governor Ueda has remained steady. His recent parliamentary comments showed no urgency to raise rates prematurely. The BoJ is expected to continue reducing its bond purchases in a gradual, predictable way, sticking with the current JPY400 billion quarterly taper paces. The next round of bond-buying plans will be announced on June 17. For now, the BoJ is walking a fine line reducing stimulus while making it clear they’re not hiking rates just to create room for future cuts.
That stance may frustrate the hawks, but it’s a smart move. The yen has been undervalued for a while, and now, as volatility returns and global uncertainty climbs, the yen’s safe-haven appeal is starting to reassert itself. Unless the BoJ pivots sharply which seems unlikely near-term USD/JPY could stay under pressure.
The global FX landscape is shifting. The dollar’s dominance is being tested by rising geopolitical noise, softer US data, and a recalibration of Fed expectations. Meanwhile, the yen is finding a bid not because Japan is roaring ahead, but because markets are rediscovering its defensive qualities at a time of global doubt.
What’s clear is that volatility is back, and macro narratives are fluid. As June unfolds, traders will need to stay agile. The US election cycle, trade war risks, and central bank path dependencies are all colliding. The easy carry trades are fading. This is a market where macro really matters again.
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