Wall Street’s twin peaks

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Another extraordinary week ended on Friday with the S&P 500 and Nasdaq hitting all-time highs as investors ramped up bets that U.S. interest rates will soon fall, a stunning turnaround from the post-’Liberation Day’ tariff gloom of early April.

Several developments this week fed into the rate cut narrative - the Iran-Israel ceasefire, tumbling oil prices, soft U.S. economic data, dovish comments from some Fed officials, and renewed pressure from President Donald Trump on the Fed to ease.

Fed Chair Jerome Powell pushed back against suggestions rates could be cut as soon as July, arguing that the impact of tariffs should be assessed first, and the consensus among the Fed’s 19 rate-setters is to hold the line too. But traders are now leaning towards three quarter-point rate cuts this year.

Progress on trade is also boosting investor sentiment. Trump said a deal between the US and China had been signed, but did not provide details, and Treasury Secretary Scott Bessent said the two countries have resolved issues surrounding shipments of rare earth minerals and magnets to the US.

That said, trade optimism was dented on Friday after Trump abruptly cut off trade talks with Canada over its new tax on U.S. technology firms, calling it a “blatant attack” and saying he will set a new tariff rate on Canadian goods next week.

The most significant market move of the week, however, was not in equities but in currencies. The dollar continued its decline, and is now down more than 10% this year. That’s its worst first-half performance of any year in more than 50 years.

It should be remembered, however, that the dollar started the year at extremely expensive levels, so some adjustment was always likely. This is proving to be a pretty severe adjustment, one which markets and policymakers appear to be relaxed about. For now.

This Week’s Key Market Moves

Chart of the Week

Self-explanatory really.

When the world’s reserve currency has its steepest January-June decline since the era of free-floating exchange rates began over half a century ago, something major is underway. How big remains to be seen. But if the Trump administration wanted a weaker currency, it can’t complain.

Here are some of the best things I read this week:

What could move markets on Monday?

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The euro is now at its strongest level against the dollar since 2021 and trade tariff talks are looming with Washington next week, ahead of a Trump-imposed global deadline of July 9. [/FRX]

The dollar weakened to a decade-low against the Swiss franc at 0.79855. It was also down 0.73% to 144.195 against the Japanese yen.

The dollar index, which measures the U.S. currency against six peers, now sits at its lowest level since March 2022 following its slide this year.

“The striking thing on the dollar trend of the last six weeks is that in almost any market regime the dollar is struggling to appreciate,” State Street’s Michael Metcalfe said.

“It seems to be in something of structural decline,” he added, highlighting State Street data that investors were now the most negative they have been on the dollar - or “underweight” in banking speak - since the COVID pandemic.

Traders are now pricing in a nearly 25% chance of the Fed cutting rates in its end-of-July meeting, compared with 12.5% last week, the CME FedWatch tool showed.

The yield on benchmark U.S. 10-year notes fell 1.6 basis points to 4.277%.