ORLANDO, Florida, June 12 (Reuters) - TRADING DAY

Making sense of the forces driving global markets

By Jamie McGeever, Markets Columnist

I'm excited to announce that I'm now part of Reuters Open

Interest (ROI), an essential new source for data-driven, expert

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The dollar's slide accelerated on Thursday, as more evidence of

cooling U.S. price pressures weighed on Treasury yields and

dragged the greenback to lows against a basket of major

currencies not seen in more than three years.

In my column today I look ahead to next week's Fed meeting.

With inflation cooling but tariffs yet to kick in, is Fed policy

still in a "good place" as Chair Jerome Powell repeatedly said

last month? More on that below, but first, a roundup of the main

market moves.

If you have more time to read, here are a few articles I

recommend to help you make sense of what happened in markets

today.

1. The dollar's crown is slipping, and fast

2. Watch out for dollar FX fall more than

'de-dollarization': Mike Dolan

3. Demand destruction can help break China's rare

earths

chokehold: Andy Home

4. China eyes stronger cooperation with ECB amid

global

trade tensions

5. U.S. tariffs may have ended BOJ's rate-hike

cycle,

former policymaker says

Today's Key Market Moves

* The dollar index hits a three-year low of 97.60, and the

euro

scales $1.16 for the first time since November 2021.

* Treasury yields fall across the curve, especially the long

end,

after a solid 30-year auction. 30-year yield is down 7 bps to

4.84%, on track for its biggest weekly fall since March.

* Wall Street posts modest gains, with the main

three

indices gaining 0.2-0.4%, led by tech.

* Oracle is the biggest advancer, up 13% to record

highs

after the cloud service provider raises its annual revenue

growth forecast; Boeing ( BA ) is the biggest decliner, down almost 5%

after a fatal Air India plane crash.

* Precious metals rise strongly, again. Gold up

nearly 1%

to nudge $3,400/oz, platinum adds 3% to nudge $1,300/oz and

bring gains in the last eight sessions to 25%.

Dollar despair deepens

The dollar grabbed the global market spotlight on Thursday,

and once again, for the wrong reasons. If it's failing to get

any support when U.S. bond yields are rising, it's getting hit

even harder when they're falling. As was the case on Thursday.

After a string of recent soft consumer inflation prints, it

was the turn of producer price inflation to cement the view that

U.S. price pressures aren't as hot as economists have thought.

Tariffs have yet to be fully felt, of course, but right now

inflation across the board is pretty tame.

Rates traders brought forward the timing of when they think

the Fed will cut interest rates to September from October and,

also supported by a strong 30-year bond auction, yields fell

across the curve.

The dollar index is now down 10% year to date, and the euro

is up 12%. We're only at the half-way point of the year, but

it's worth noting that the last time the dollar fell more than

10% in a calendar year was 2003.

Much of its weakness this year is down to non-U.S. investors

hedging their exposure to U.S. assets much more than they have

previously. In effect, that equates to selling dollars, and

European pension and insurance funds are at the heart of it.

"Our analysis suggests there is much more still to come,"

reckon analysts at BNP Paribas, recommending that investors buy

the euro with a target of $1.20.

They calculate that if Dutch and Danish pension funds reduce

dollar exposure to 2015 levels as a share of total assets under

management, they have a further $217 billion to sell. And that's

just Danish and Dutch funds.

On the tariffs front, investors are still digesting this

week's U.S.-China deal, outlined by Washington on Wednesday and

confirmed by Beijing on Thursday. Still, there is some ambiguity

around key elements of the deal, including rare earth export

licenses and details of the tariffs.

JPMorgan's U.S. economists calculate that, all told, the

total effective U.S. tariff rate will be around 14%. When levied

on $3.1 trillion of imported goods, that equates to a tax on

U.S. businesses and consumers of over $400 billion. It remains

to be seen how that is split, but history shows consumers bear

most of the burden, they note.

"The stagflationary impulse from higher tariffs has lowered

our GDP growth outlook for this year (4Q/4Q) from 2.0% at the

start of the year to 1.3% currently," they wrote on Thursday.

On the other hand, economists at Oxford Economics on

Thursday raised their 2025 U.S. GDP forecast to 1.5% from 1.3%

and said the likelihood of recession has fallen.

You pay your money, you take your choice.

Is the Fed still in a "good place"?

At the Federal Open Market Committee meeting next week,

investors will scrutinize all communications for any sign that

the recent softening in U.S. inflation could be enough to nudge

policymakers closer to cutting interest rates.

Current economic data might be leaning in that direction,

but policy out of Washington could well keep Chair Jerome Powell

and colleagues in 'wait and see' mode.

No one expects the Fed to cut rates next week, but

businesses, households and investors should get a better sense

of policymakers' future plans from the revised quarterly Staff

Economic Projections and Powell's press conference.

Powell was very clear in his post-meeting press conference

last month that the Fed is prepared to take its time assessing

the incoming economic data, particularly the impact of tariffs,

before deciding on its next step.

He told reporters no less than eight times that policy is in

a "good place" and said four times that the Fed is "well

positioned" to face the challenges ahead. Will he change his

tune next Wednesday?

Annual PCE inflation in April was 2.1%, the lowest in four

years and virtually at the Fed's 2% target, while CPI inflation

in May was also lower than expected. The labor market is

softening, economic activity is slowing, and recent red-hot

consumer inflation expectations are now starting to come down.

In that light, it may be surprising that markets are not

fully pricing in a quarter-point rate cut until October.

"The upcoming meeting offers an opportunity (for Fed

officials) to signal that the recent mix of tamer inflation and

softer consumption growth warrant a careful 'recalibration' of

rates lower, while remaining very cautious about what comes

next," economist Phil Suttle wrote on Wednesday.

But there are two well-known barriers that could keep the

Fed from quickly re-joining the ranks of rate-cutting central

banks: tariffs and the U.S. fiscal outlook.

WASHINGTON WILD CARD

Tariffs have yet to show up in consumer prices, especially

in goods, and no one knows how inflationary they will be. They

could simply result in a one-off price hit, they could trigger

longer-lasting price spikes, or the inflationary impact could

end up being limited if companies absorb a lot of the price

increases. In other words, everything is on the table.

Equity investors appear to be pretty sanguine about it all,

hauling the S&P 500 back near its all-time high. But Powell and

colleagues may be slower to lower their guard, and for good

reason.

Although import duties on goods from China will be lower

than feared a few months ago and Washington is expected to seal

more trade deals in the coming weeks, overall tariffs will still

end up being significantly higher than they were at the end of

last year, probably the highest since the 1930s.

Economists at Goldman Sachs reckon U.S. inflation will rise

to near 4% later this year, with tariffs accounting for around

half of that. This makes the U.S. an "important exception" among

industrialized economies, the OECD said last week.

The other major concern is the U.S. public finances.

President Trump's 'big beautiful bill' being debated in congress

is expected to add $2.4 trillion to the federal debt over the

next decade, and many economists expect the budget deficit will

hover around 7% of GDP for years.

With fiscal policy so loose, Fed officials may be reluctant

to signal a readiness to loosen monetary policy, especially if

there is no pressing need to do so.

FOMC members in December last changed their median forecasts

for the central bank's policy rate, hiking it this year and next

year by a hefty 50 basis points to 3.9% and 3.4%, respectively.

They left projections unchanged in March amid the tariff fog.

That implies 50 basis points of rate cuts this year and

another 50 bps next year, which is pretty much in line with

rates futures markets right now. So perhaps Fed policy is still

in a "good place", but with economic expectations changing

quickly, it's unclear how long that will be the case.

What could move markets tomorrow?

* Japan industrial production (April, revised)

* Japan tertiary activity index (April)

* Germany wholesale inflation (May)

* Euro zone trade (April)

* Euro zone industrial production (April)

* ECB board members Patrick Montagner and Frank Elderson

speak at

separate events

* Canada trade (April)

* U.S. University of Michigan consumer sentiment, inflation

expectations (June, prelim)

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