Global financial markets have recently been challenged by a series of events that are testing investor resilience and perception. Israel’s strike on Iran and the threat of escalating conflict appear to be key catalysts, but the market’s reaction to this event has not entirely aligned with traditional expectations. This has sparked debate over a potential fundamental shift in the role of the U.S. dollar and other financial assets in the global economy. Rather than acting as an unshakable “safe haven,” the dollar’s relatively muted reaction to this geopolitical unrest supports the narrative that its dominance may be beginning to shift. The selloff in U.S. stocks and bonds heading into the weekend, while not definitive “proof,” adds another layer of evidence to this growing argument.
The US Dollar Dynamics and Trump’s Trade Policy
A key factor long influencing the U.S. dollar has been the trade policies under the Trump administration. Historically, the dollar has tended to weaken whenever President Trump floated tariff threats — a pattern that seems to continue. The latest threats to send out bilateral tariff notices and raise tariffs on automobiles have raised concerns, particularly as they could complicate U.S. efforts to reach trade deals with Japan and Europe. The administration’s pledge to deliver “90 deals in 90 days” has proven overly ambitious, with only one tangible deal realized so far — with the UK. This reflects the slow progress in their broader trade agenda.
Focus on Global Central Banks
The upcoming week will be pivotal for markets as several major central banks prepare for monetary policy meetings. The Federal Reserve (Fed), Bank of Japan (BOJ), Norges Bank, and Bank of England (BoE) are expected to hold their benchmark rates steady. Of particular interest will be the Fed’s updated economic projections, which markets will be watching closely. While the Fed’s December and March median forecasts called for two rate hikes, Fed funds futures have yet to fully price them in. Markets are also awaiting signals about any possible adjustment to the Fed’s balance sheet reduction (Quantitative Tightening/QT).
On the other hand, Sweden’s Riksbank and the Swiss National Bank are expected to cut interest rates. A rate cut in Sweden would bring the policy rate down to 2%, likely marking its lower bound. The situation is more intriguing in Switzerland, where inflation has dipped into deflationary territory, prompting speculation about a potential return to negative interest rates. However, this does not appear to be an immediate concern, as currency pressures remain manageable.
Regional Financial Market Analysis
United States (U.S.)
The dollar’s subdued response to the Israel-Iran strikes has raised questions about its “safe haven” status. The upcoming FOMC meeting will be crucial — not for any immediate policy changes, but for economic projections and potential commentary on balance sheet policy (QT), which could shape future market expectations. Key real sector data this week, including auto sales, retail sales, and industrial production, are expected to show signs of softening. The Treasury’s International Capital report will also be closely watched amid discussions of capital flight following retaliatory tariff announcements. From a technical perspective, the Dollar Index needs to break above resistance near 98.70 to signal further upside.
Eurozone (EMU)
The correlation between the euro and the U.S.–Germany interest rate differential has declined significantly, suggesting that the European Central Bank (ECB) is well ahead of the Fed in the easing cycle. Markets expect a pause in the ECB’s easing cycle, with one more cut likely before year-end. Key data releases include the monthly financial report, construction spending, and the German ZEW Survey. The euro had strengthened slightly above $1.1630 but then retreated after the Israeli strike. Key support lies around $1.1370.
China (PRC)
The Chinese yuan has been one of the most stable currencies against the U.S. dollar this year, appreciating by about 1.75%. This is no coincidence, as Beijing appears to be maintaining a stable exchange rate. May’s real sector data from China is expected to reflect a slowdown, as indicated by PMI warnings. Although tariff adjustments with the U.S. are expected mid-month, reports indicate that container traffic at U.S. West Coast ports ground to a halt again at the end of May. The People’s Bank of China (PBOC) continues to set lower daily reference rates for the dollar, signaling that it is not resisting a slow yuan appreciation.
Japan
The Bank of Japan (BOJ) is struggling to normalize monetary policy amid weak economic conditions and high inflation. While Governor Ueda is expected to reaffirm the likelihood of a rate hike if the economy progresses as anticipated, swaps markets are still not fully pricing in a significant move. The yen’s correlation with the Dollar Index has reached a 30-year high. Key upcoming data include the BOJ meeting and May’s CPI, which is expected to show persistent price pressure. The yen initially strengthened after the Israeli strike but later weakened due to general U.S. dollar strength.
United Kingdom (UK)
The British pound reached a new three-year high last week, though this was largely due to broad U.S. dollar weakness rather than positive UK developments. UK data has generally surprised to the downside. The Bank of England is expected to slow its policy easing cycle. May’s CPI report and BoE meeting will be key focal points, though policy changes are unlikely. May’s retail sales figures will also attract attention.
Canada
The Canadian dollar’s movement has been highly correlated with the U.S. dollar. It has shown relatively low correlation with oil prices but a stronger correlation with gold. April’s portfolio flows and retail sales data showed improvement. However, markets have not fully priced in the likelihood of a Bank of Canada rate cut next month. The Canadian dollar was one of the few G10 currencies to strengthen against the U.S. dollar toward the end of last week.
Australia
Over the past 30 sessions, the Australian dollar has been more correlated with the Dollar Index than with the Canadian dollar. However, the 60-day correlation trend shows the opposite. The Australian dollar also has a strong correlation with gold prices. May’s employment report will be a key release this week. While the labor market remains relatively stable, there is still a strong likelihood of another rate cut by the Reserve Bank of Australia. After dropping to a seven-day low following the Israeli strike, the Australian dollar rebounded.
