The U.S. dollar nudged higher on Tuesday, though overall activity in the currency markets remained subdued as investors awaited more definitive signals regarding trade negotiations ahead of the crucial August 1 deadline. That deadline looms with the threat of significant tariffs on U.S. trading partners who have yet to secure agreements.
The Japanese yen held most of its gains from the previous session following Japan’s upper house elections over the weekend, which largely met market expectations. Attention now shifts to how quickly Tokyo might finalize a trade deal with Washington and the political outlook for Prime Minister Shigeru Ishiba.
With just over a week left until the tariff deadline, U.S. Treasury Secretary Scott Bessent stressed on Monday that the administration is more focused on the substance of trade deals rather than rushing their completion. When questioned about a possible extension for countries making constructive progress, Bessent deferred the decision to President Donald Trump.
Uncertainty over the final shape and scope of tariffs continues to cast a shadow over forex markets, keeping major currencies trading within narrow bands—even as U.S. stock markets reach fresh highs.
“Nothing that happens on August 1 is necessarily permanent, so long as the U.S. administration remains willing to talk, as was indicated in Trump’s letters from two weeks ago,” said Thierry Wizman, global FX and rates strategist at Macquarie Group.
The euro dipped slightly to $1.1692 as investors prepare for this week’s European Central Bank meeting, which is expected to hold interest rates steady in the eurozone.
Negotiations between the European Union—facing potential 30% tariffs from August 1—and the U.S. remain deadlocked. EU diplomats disclosed Monday they are exploring a wider range of countermeasures given the fading prospects of a deal.
“The Trump administration has shown little tolerance for retaliatory measures, and there is a risk this could spiral (even if temporarily) into a tit-for-tat tariff escalation. The euro’s ability to maintain preference over the dollar amid tariff tensions will depend on the extent of any escalation and whether the EU emerges as a relative loser while other countries secure significant deals with the U.S.”
In a separate update, the ECB reported Tuesday that loan demand among eurozone companies improved last quarter and is expected to strengthen further despite ongoing tariff threats and geopolitical uncertainties.
Against a basket of currencies, the dollar inched up 0.1% to 97.91 after falling 0.6% on Monday.
Concerns also linger over the Federal Reserve’s independence, following President Trump’s repeated criticism of Fed Chair Jerome Powell and calls for his resignation amid the central bank’s reluctance to cut interest rates.
“Our base case remains that solid U.S. data and a tariff-driven rebound in inflation will keep the FOMC on hold into 2026, and that the resulting shift in interest rate differentials will drive a continued rebound in the dollar in the next few months,” said Jonas Goltermann, deputy chief markets economist at Capital Economics. “But that view is clearly at the mercy of the White House’s whims.”
The yen stayed in focus, trading slightly lower at 147.64 on Tuesday after a 1% gain Monday following the election and a public holiday.
“The initial relief for the yen that the ruling coalition did not lose even more seats and that Prime Minister Ishiba plans to hang on to power is likely to prove short-lived,” said Lee Hardman, senior currency analyst at MUFG. “The pick-up in political uncertainty in Japan could complicate reaching a timely trade deal with the U.S., posing downside risks for Japan’s economy and the yen.”
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