Recent softer-than-expected US CPI data has fueled speculation the Federal Reserve may adopt a more dovish stance, potentially weakening the dollar. Discussions between US and South Korean officials on exchange rate policies, alongside Japan’s finance minister’s comments on currency matters, have heightened market suspicions the Trump administration may favor a weaker dollar to facilitate trade deals, despite assurances from Treasury Secretary Bessent of a strong dollar policy. This perception, reinforced by earlier Asian currency strength in May, could prompt Asian nations with substantial dollar reserves—estimated at $2.5 trillion by Eurizon SLJ Capital’s Stephen Jen—to unwind positions or hedge, boosting demand for the euro, yen, and gold. Meanwhile, ECB supervisors are urging European banks to prepare for potential US dollar shortages under a less cooperative Trump administration, while German Chancellor Merz announced plans to boost defense spending to over €60 billion annually, aiming to transform Germany’s military into Europe’s strongest to counter Russian threats and support Ukraine.

USDJPY is tracking the narrowing spread between US and Japanese 10-year yields, with Japan’s yields reaching a two-week high. ING analysts are predicting the yen will strengthen, eyeing USDJPY 140.00, as the Bank of Japan is expected to resume rate hikes by 25 basis points in Q3 while the Federal Reserve may restart rate cuts. Renewed talks between the US and Asian economies, including Japan and South Korea, on currency matters are reviving May’s “currency appreciation for trade accords” narrative, which previously drove the Bloomberg Asia Dollar Index higher, with the yen poised to benefit significantly. Japan’s Prime Minister Ishiba aims to secure a trade deal with the US by July, coinciding with the end of the “Liberation Day” tariff pause and Japan’s upper house elections, though high auto tariffs could delay an agreement to avoid political backlash. A successful trade deal could shift market focus back to BOJ rate hikes, as tariff uncertainties have been a key obstacle.

The People’s Bank of China set the yuan’s daily reference rate at 7.1956, weaker than the Bloomberg survey’s expectation of 7.1842, marking the first such divergence since November and signaling cautious management to prevent rapid yuan appreciation that could harm export competitiveness amid economic stabilization efforts. This stance supported a rebound in offshore USDCNH and limited gains in antipodean currencies, though a temporary trade truce and renewed currency appreciation talks among Asian competitors like Japan and South Korea could ease China’s concerns, potentially allowing faster yuan appreciation and boosting antipodean currencies. In Australia, April’s employment surged by 89,000, with full-time jobs up 59,500, pushing the participation rate to a near-record 67.1% while unemployment held at 4.1%; despite consumer inflation expectations easing to 4.1%, persistent price pressures and global tariff risks may not deter the Reserve Bank of Australia from a likely rate cut on May 20, though robust jobs data could temper expectations for further easing this year.