The U.S. dollar strengthened on Thursday following the announcement of a trade agreement between the United States and Vietnam, sparking optimism about the possibility of further deals before U.S. tariffs come into force on July 9. Meanwhile, investors remained focused on upcoming payroll data to gauge the Federal Reserve’s next policy move.
The British pound held steady, recovering slightly from a nearly 1% drop the previous day. This came after UK Prime Minister Keir Starmer’s office reaffirmed support for embattled Finance Minister Rachel Reeves, in an effort to ease investor concerns over Britain’s fiscal position.
UK government bond prices fell sharply on Wednesday, following an emotional parliamentary appearance by Reeves, just a day after the government reversed plans for welfare reform — a move that further unsettled fiscal sentiment.
In currency markets, the pound was last trading at $1.3628. The euro dipped slightly to $1.1788, though it remained close to its highest level since September 2021. The yen also weakened marginally, reaching 143.84 against the dollar.
According to Carol Kong, a currency strategist at the Commonwealth Bank of Australia, there is market anxiety that Reeves may be replaced by someone less dedicated to fiscal discipline and more open to increasing government borrowing.
“Unless the UK government takes steps to rebuild confidence in its fiscal credibility, the pound could remain under downward pressure,” Kong said.
The U.S. dollar index—which measures the dollar’s value against a basket of six major currencies—rose 0.11% to 96.862. Despite the gain, it stayed near its lowest levels in three and a half years and was on track for a 0.5% weekly decline.
Market focus is now turning to the U.S. Labor Department’s June employment report, due Thursday ahead of the July 4 holiday. This follows a private-sector jobs report from ADP, which showed the first decline in private payrolls in over two years.
This softer data led traders to adjust expectations for interest rate cuts, with the CME FedWatch tool showing a 25% probability of a rate cut in July, up from 20% the previous day.
“The ADP report has raised the stakes for the nonfarm payrolls release,” said Charu Chanana, chief investment strategist at Saxo.
“Previously, weak data might have been seen as a catalyst for rate cuts. Now, it might just deepen recession fears.”
In trade developments, President Trump announced a deal with Vietnam, expressing hope for similar agreements with other countries ahead of the July 9 deadline. While details were limited, he stated that Vietnamese exports would face a 20% tariff, and goods rerouted through Vietnam from third countries would be hit with a 40% levy.
Chanana noted the agreement was generally positive but said the tariff levels were higher than expected, especially the 40% rate on trans-shipped products.
“China’s response will be critical, as the move directly affects rerouted goods,” she said.
The Vietnamese dong fell to a record low, with UBS analysts suggesting the central bank may allow a gradual depreciation to help exporters absorb the tariff impact.
Progress with other nations has been sluggish. Japan cited national interest concerns in talks with the U.S., while South Korea’s President Lee Jae Myung admitted negotiations were challenging and unsure if a deal could be reached by next Tuesday.
On the fiscal front, U.S. House Republicans made progress toward advancing Trump’s major tax-and-spending legislation, seemingly overcoming resistance from fiscal conservatives. However, the bill, projected to increase the national debt by $3.3 trillion, is fueling anxiety among global bond investors already uneasy about rising deficits in countries like the U.S. and Japan.
Elsewhere in currency markets, the Australian and New Zealand dollars weakened ahead of the U.S. jobs data. The Aussie was last at $0.65655 and the kiwi at $0.6067, both down 0.3%.
