The U.S. dollar gained strength on Tuesday, driven by a sharp decline in Japan’s long-term bond yields that weighed heavily on the yen. The greenback also found support from better-than-expected U.S. consumer confidence data.
“This move is largely tied to developments in the global bond markets, particularly the recent shifts in Japan,” said Eric Theoret, a foreign exchange strategist at Scotiabank in Toronto. He pointed to a questionnaire sent by Japan’s Ministry of Finance to its primary dealers as a potential signal of upcoming changes in bond issuance.
According to Bloomberg, the Japanese government is surveying market participants about bond issuance and broader market dynamics. Two sources told Reuters that Japan is considering cutting back on super-long bond issuance following a surge in yields, triggered by weakening demand from traditional buyers like life insurers and concerns over Japan’s rising debt.
As a result, the dollar rose 1% to 144.26 yen, while the euro dropped 0.27% to $1.1356.
Further bolstering the dollar was a positive surprise in U.S. consumer confidence data for May, suggesting improved sentiment among American consumers.
Meanwhile, the euro came under pressure following reports that French inflation in May hit its lowest level since December 2020, weakening the case for tighter monetary policy in the eurozone.
The dollar also benefited from a policy shift by U.S. President Donald Trump, who over the weekend withdrew his threat to impose 50% tariffs on European Union imports starting next month. The EU welcomed the move, saying it gave a “new impetus” to ongoing trade negotiations.
While markets are wary of how tariffs might dampen growth or rekindle inflation, optimism around the U.S. economy has improved, especially after Washington and Beijing reached an agreement earlier this month to reduce mutual tariffs.
Despite short-term gains, analysts like Theoret caution that the U.S. dollar may face long-term weakness, driven by the country’s increasingly protectionist trade stance.
On Monday, ECB President Christine Lagarde noted that the euro could eventually rival the dollar as a global reserve currency, provided the EU enhances its financial and security integration.
Markets are also closely monitoring progress on a spending and tax bill in the U.S. Congress that could add trillions to the national debt. Senate Republicans announced Thursday that they would push for major revisions to the bill, which narrowly passed the House of Representatives.
