Following a recovery in the North American afternoon for the second consecutive session yesterday, the dollar has experienced selling pressure once again in Asia and Europe today. The market appears largely indifferent to the recent developments of new hostilities in the Middle East. The ceasefire, as frequently observed, has shown signs of strain yet seems to hold steady. It appears to be in effect until May 17. Late yesterday, a federal trade court delivered a narrow ruling with a 2-1 vote, granting a request from a coalition of small businesses and Washington state to halt the US from collecting the Section 122 tariffs. The attention now turns to the US jobs report. Prior to the report, the Fed funds futures reflect a tightening of approximately two basis points for this year, a decrease from nearly eight at the start of the week. In light of the prevailing uncertainties in the Middle East, it is likely that the market will reduce its risk exposure ahead of the weekend.

The dollar is generally weaker, and the significant defeat of the UK’s Labour Party, along with the unexpected decline in German industrial output, did not significantly affect the market. The euro exhibited strong performance yesterday; however, it could not build on the gains achieved during Wednesday’s rally, which brought it close to $1.1800. For the second consecutive session, the euro experienced selling pressure in the North American afternoon. Disappointed investors seemed to step back, resulting in the euro retreating to approximately $1.1735. In light of recent escalations in the Middle East and a surprising drop in German industrial production, the euro has shown a consistent upward trend, now approaching the $1.1775 level in Europe. Options are available for 1.77 billion euros at a rate of $1.18 and 1.57 billion euros at $1.1750, both set to expire today. Two rounds of intervention by the BOJ, occurring on April 30 and May 6, effectively reduced the dollar’s value from approximately JPY160.70 to nearly JPY155 by Wednesday. It maintained a position above JPY156 yesterday, reaching a session high close to JPY156.65 during the North American trading hours. The dollar approached JPY157 today, with options worth $620 million set to expire today.

Some analysts view the Fed’s custody holdings as an additional indicator, apart from the BOJ’s accounts, that may reflect intervention activities. The Fed’s custody holdings of US Treasuries increased for the third straight week in the week ending May 6. It does not imply that intervention was absent. This suggests that the BOJ might not have liquidated Treasuries from this account. Sterling demonstrated strength yesterday; however, the market could not build on its recent advancements. Wednesday’s peak was around $1.3635, while the high from the previous week approached $1.3660. Yesterday, it briefly exceeded $1.3630 but subsequently declined during the North American afternoon, dropping to nearly $1.3560. In light of Labour’s setbacks in the recent local elections and the increasing pressure on Prime Minister Starmer to resign, the overall market reaction appears to be quite limited. Sterling has strengthened not only against the dollar but has also gained ground against the euro. It has reached $1.3625 today. UK Gilts are currently leading the bond market performance, showing a slight decrease of just over five basis points in the 10-year yield. Options for GBP1.35 billion at $1.3600 are set to expire today.

The US dollar experienced an increase, reaching a new five-session high yesterday against the Canadian dollar, climbing to approximately CAD1.3665. The currency maintained its position today, with the greenback retreating to approximately CAD1.3640 in Europe. The peak observed last week approached CAD1.3715. The CAD1.3650 level aligns with the (61.8%) retracement of the dollar’s declines from the peak observed last week to the low recorded on May 1 (~CAD1.3550). Should the Australian dollar finish above $0.7200 today, coinciding with the expiration of options for A$880 million, it will signify the fifth weekly gain in the last six weeks. It approached nearly $0.7265 yesterday, marking its highest point since July 2022. However, it experienced a downward trend during the North American session, reaching a session low in late trading around $0.7215. It maintained a position above $0.7200 and is approaching session highs (~$0.7240) during late European morning activity.