(The opinions expressed here are those of the author, a

columnist for Reuters.)

A look at what matters in U.S. and global markets today from

Mike Dolan, Editor-At-Large, Finance and Markets

LONDON, June 2 (Reuters) - The U.S. dollar plunged anew

to its lowest level in six weeks on Monday as June got

underway, with U.S. tariff concerns back on the boil after last

week's legal confusion and military tensions rising across the

globe.

The euro led the charge, undaunted by the prospect of

another interest rate cut from the European Central Bank on

Thursday. Germany's new chancellor, Friedrich Merz, will travel

to Washington to meet U.S. President Donald Trump on Thursday as

trade talks between Europe and America are watched closely.

With markets still on edge about elements of the U.S. fiscal

bill going through the Senate that give the administration the

option of taxing companies and investors from countries deemed

to have 'unfair foreign taxes', the dollar is vulnerable to

worries about foreign capital flight.

But the attention on Monday seemed back on the tariff push,

with an assumption President Donald Trump will push through

levies one way or another despite the legal pushback last week.

The greenback was hit after the weekend by Trump's plan to

double duties on imported steel and aluminum to 50% from

Wednesday and as Beijing hit back against accusations it

violated an agreement on critical minerals shipments.

It was also a weekend of significant geopolitical tensions

and bellicose warnings. Gold crept higher.

U.S. Defense Secretary Pete Hegseth warned on Saturday that

the threat from China was real and potentially imminent as he

pushed allies in the Indo-Pacific to spend more on their own

defence needs. The Ukraine-Russia war continued to rage, with

Ukrainian drones hitting dozens of Russian bombers deep inside

Russian territory. The Gaza conflict shows no sign of ending.

Major countries are building armaments at pace. Britain will

expand its nuclear-powered attack submarine fleet as part of a

defence review, one designed to prepare the country for modern

war and counter the Russian threat.

Oil prices jumped by about 3% on Monday after producer group

OPEC+ kept output increases in July at the same level as the

previous two months.

In a big week for U.S. labor market data, there was some

encouragement on the interest rate front.

Federal Reserve Governor Christopher Waller said on Monday

that rate cuts remain possible in the second half of the year.

Given that a rise in inflation pressures tied to Trump's import

tax increases is unlikely to be persistent, "I support looking

through any tariff effects on near term-inflation when setting

the policy rate," Waller told a gathering in South Korea.

Elsewhere, China's manufacturing activity shrank for a

second month in May, as expected.

Stocks in Poland .WIG20 fell 1.4%, after nationalist

opposition candidate Karol Nawrocki won the second round of the

country's presidential election.

Ahead of Monday's bell, U.S. stock futures were down about

half a percent, with stocks in Europe and Japan down too. U.S.

Treasury yields nudged back higher.

Today's column looks at the week's big monetary decision in

Europe, with the European Central Bank widely expected to lower

rates for the eighth time in the cycle and the euro rising

regardless.

ECB FACES SURGING EURO CONUNDRUM

While the European Central Bank keeps cutting interest

rates, the euro keeps rising, as a transatlantic capital

reversal upends relative rate shifts and threatens to force the

ECB into further easing.

The ECB is widely expected to lower its main borrowing rate

on Thursday to 2%, half what it was at its peak a year ago and

less than half the Federal Reserve equivalent. It's also back to

what the central bank broadly considers a 'neutral' level,

meaning it neither spurs nor reins in the economy.

Real, or inflation-adjusted, ECB rates will be back to zero

for the first time in almost two years.

What's remarkable is that after eight consecutive ECB cuts

and with the prospect of zero or even negative real rates ahead,

the euro has surged more than 10% against the dollar in

just four months and 5% against a trade-weighted

currency basket of the euro zone's major trading partners.

That nominal effective euro index is now at record highs,

with the 'real' version at its strongest level in more than 10

years.

The currency has surged even though there has been no net

change in the gap between two-year government bond yields on

either side of the Atlantic - usually a reliable

indicator of shifts in the euro/dollar exchange rate.

The culprits behind this trend are pretty clear: Donald Trump's

tariff wars, fears of capital flight from dollar assets due to a

host of concerns about U.S. policies and institutions, and

Germany's historic fiscal boost that has transformed the

continent's outlook.

But if even a fraction of the trillions of dollars of

European investment capital in the United States is indeed

coming back home as many suspect, the ECB has a curious

conundrum ahead. How does it handle both the disinflationary

effects of such a rapid currency rise alongside the domestic

demand it could catalyse?

Lower rates with the prospect of further easing ahead are

clearly having little impact on the euro. Most ECB watchers

expect one or two more cuts after Thursday while money markets

have a 'terminal rate' around 1.75%, the low end of the ECB's

estimated range of 'neutral'.

Indeed, if much of the capital repatriation from overweight U.S.

holdings is in equity investments, then lower ECB rates may even

accelerate the outflows from the U.S. by lifting growth

prospects for cheaper stocks in Europe.

The prospect of higher German and pan-European borrowing should

sustain longer-term fixed income returns as well, expanding the

pool of 'safe' investments.

'GLOBAL EURO MOMENT'

The ECB could revert to protesting about 'excessive' euro

gains, although the impact might be limited unless it is

prepared to back its words with action, and there is a risk it

could backfire for the reasons just mentioned.

If anything, the ECB appears to be encouraging the

investment shift and the euro's role as a reserve currency - in

part to help with the bloc's massive capital needs in retooling

its military, digital and energy sectors.

In a pointed speech in Berlin last week, ECB chief Christine

Lagarde insisted there was an opening for a "global euro

moment", where the single currency becomes a viable alternative

to the dollar, earning the region immense benefits if

governments can strengthen the bloc's financial and security

architecture.

The scenario may be seen as a nice problem to have, but

there will be more than a little disquiet among the region's big

exporting nations about a soaring exchange rate in the middle of

a trade war.

ECB hawks and doves will also have to thrash out whether

continued easing to offset disinflationary currency risks only

stokes domestic inflation over the longer term - not least with

a fiscal lift coming down the road into next year.

What seems clear is that the ECB's new economic forecasts

due for release on Thursday will have taken into account the 7%

euro/dollar gain and near 10% drop in global oil prices since

its last set of projections in early March.

Morgan Stanley economists reckon that even if the central

bank tweaks its core inflation forecasts higher, the new outlook

could well show headline inflation undershooting its 2% target

from mid-2025 to early 2027 - even while nudging up 2025's GDP

growth view.

In truth, any forecasts at this point are fingers in the

wind with few central banks or major investors having a clue

where U.S. tariffs or retaliatory trade war actions will end up.

But while global trade and investment nerves abound, the ECB

may be relatively powerless to cap the euro. Whether that argues

for stasis or even more easing is the big headache it faces.

Chart of the day

U.S. gross domestic product readings have been bamboozled this

year by tariff-related import skews. Again last week, models

tracking GDP inputs were jarred by a sharp contraction in the

goods trade deficit for April as front-running of imports to

beat tariffs in the first quarter faded. With many tariffs in

place, imports plunged and helping to compress the goods trade

deficit by 46% to $88 billion, according to the Commerce

Department's Census Bureau. Imports fell $68 billion to $276

billion while exports rose $6.3 billion to $188.5 billion. The

shrinking goods deficit, if sustained, suggests the net trade

component of GDP calculations will spur a significant rebound in

growth this quarter, much like it sliced a record 4.9 percentage

points from Q1 GDP - leading to a headline contraction in the

overall economy. Flattered by the trade numbers, the Atlanta

Federal Reserve's 'GDPNow' tracker now sees a whopping Q2 real

GDP rebound of 3.8%. However, there is caution. Businesses do

not appear to be restocking, with wholesale inventories

unchanged last month and stocks at retailers down 0.1% and there

is concern stockpiles may well drop sharply over the remainder

of the quarter.

Today's events to watch

* US May manufacturing surveys from S&P Global (0930EDT) and

ISM (1000EDT), April construction spending (1000EDT)

* Federal Reserve Chair Jerome Powell gives opening remarks

at Fed event in Washington; Fed Board Governor Christopher

Waller, Dallas Fed President Lorie Logan and Chicago Fed

President Austan Goolsbee all speak; Bank of England policymaker

Catherine Mann speaks

* US corporate earnings: Campbell's

Opinions expressed are those of the author. They do not reflect

the views of Reuters News, which, under the Trust Principles, is

committed to integrity, independence, and freedom from bias.

(By Mike Dolan;)