Written by the Market Insights Team
Not an exodus, but recalibration
Kevin Ford – FX & Macro Strategist
One of the key narratives weighing on the U.S. dollar is the perception that institutional investors, and even central banks, are gradually reducing exposure to the greenback. Markets see this shift as a response to growing concerns around U.S. fiscal and economic policy, prompting a broader tilt toward other assets and regions.
According to April data from the Treasury International Capital (TIC) system, there was indeed net selling of U.S. Treasuries, but it was measured rather than dramatic. Foreign private investors reduced their Treasury holdings by $36 billion, bringing total foreign ownership down to approximately $9 trillion. Notably, however, this retreat was not uniform. While the private sector stepped back, foreign official institutions moved in the opposite direction, increasing their exposure to longer-dated U.S. notes and bonds. Japan and the United Kingdom were among the countries adding to their holdings, while China and Canada reduced their positions. Canada’s pullback stood out with a $57.8 billion decline, the most sizable among major holders.
Canada’s role in this broader reassessment of U.S. exposure extends beyond its Treasury holdings. Charles Emond, CEO of Caisse de Dépôt et Placement du Québec (CDPQ), recently outlined the fund’s plans to reduce its U.S. footprint following a decade of robust returns. As of year-end 2024, approximately 40% of CDPQ’s $473 billion in assets remain U.S.-linked, spanning both equities and real estate. Emond pointed to growing concerns about Section 899, a proposed tax provision within President Trump’s fiscal package, as a key factor. The measure, aimed at countries that levy digital services or other corporate taxes deemed discriminatory by the U.S., could raise the effective tax burden on Canadian investors, prompting CDPQ to reassess what Emond described as a “peak” level of allocation to U.S. markets.
Despite these nuanced shifts, total foreign holdings of U.S. Treasuries remain elevated, nearing a record at $9.01 trillion. Yet investor behavior is becoming more selective. Alongside the trimming of Treasuries, long-term agency debt and U.S. equities also saw outflows, while long-term corporate bonds garnered increased attention. In essence, this is less a story of exodus than one of recalibration or capital rebalancing driven by fiscal uncertainties, geopolitical tensions, and strategic diversification.
The DXY posted today its lowest level in 3 years, with sentiment skewed firmly to the downside amid a backdrop of easing volatility and risk-on market positioning. Investors are eyeing today’s weekly initial jobless claims for fresh clues on labor market momentum, a key barometer for the Fed’s next moves. As July approaches, attention is starting to pivot toward trade policy, with July 9 marking the expiration of the 90-day reprieve tied to the Trump administration’s so-called “Liberation Day” agenda. For now, however, markets appear content to brush aside political noise, buoyed by calmer conditions and appetite for higher-yielding assets.
Not just weak dollar: Europe’s turn to prove itself
Antonio Ruggiero – FX & Macro Strategist
The euro surged to highs of $1.174 in early London trading—levels not seen since 2021—in what can only be described as a dollar-driven rally. The fleeting support for the greenback, born of geopolitical tensions and its traditional safe-haven appeal, has all but evaporated. What remains is a backdrop dominated by dollar headwinds—creating indirect tailwinds for the euro, which has risen nearly 2% against the dollar since geopolitical tensions had began to ease earlier in the week.
First, markets are now front-running a raft of upcoming US data—durable goods, personal income, PCE, and University of Michigan sentiment—all expected to print flat or weaker. Second, month-end flows are kicking in. With US assets outperforming globally (the S&P is up 3.1% this month), investors are rebalancing by selling dollars. What’s notable this month is the twist: typically, a weaker dollar reduces the need to rebalance—but this time, dollar strength in June driven by geopolitical tensions actually intensified the selling pressure. Layered on top of this is a political catalyst: a Wall Street journal report indicated that President Donald Trump may fast-track the appointment of the next Federal Reserve Chair—fueling speculation of an accelerated rate-cutting cycle.
Ok, so dollar negatives are stacking up. But what about the euro?
Yes, the euro will continue to benefit from persistent dollar pessimism, but markets are becoming increasingly eager for authentic European tailwinds to justify further upside.
Enter the Citi Economic Surprise Index, which has steadily climbed from early May lows into positive territory. That reflects improving momentum, with more data exceeding expectations. A reading of 26 isn’t explosive, however, and the index would need to strengthen further to meaningfully reinforce the euro’s ascent.
And while the current narrative may circle back to trade now—the original spark behind the euro rise—this time, something may be different. Markets no longer anticipate a dramatic return of April’s steep tariffs when Trump’s 90-day pause expires on July 8. The prevailing view is that the 10% base levy stays in place, while harsher “reciprocal” measures are either shelved or renegotiated. Now, whether that 10% remains too high is almost beside the point—markets crave certainty, and if this becomes the new norm, that alone could help cap further dollar downside. At the same time, if tariff revenues begin to ease deficit anxieties, that too could bolster confidence in the dollar—via the public debt demand channel.
That leaves the recently more dovish-leaning Fed as the single most powerful external tailwind for the euro. But even here, it’s perception—not just policy—that will drive the dollar’s reaction.
A rate cut framed as “inflation has remained subdued, perhaps Trump was right on tariffs after all” would likely dent the dollar less than a cut triggered by traditional fears of slowing economic momentum. That’s because today’s dominant narrative around dollar weakness stems not from growth differentials, but from persistent fears that tariffs would ignite inflation—fears long held by the Fed and beyond. If evidence emerges that those fears were overstated, and inflation is in fact proving benign, the dollar could find some relief. Markets would read that as a sign the Fed had over-tightened—not that the economy is weakening—which is a far less damaging story for the greenback.
The Fed-preferred PCE is due tomorrow, while CPI won’t be released until July 15. And while the outcome of these prints remains contested, one thing is clear: if EUR/USD is to make a run at the $1.20 mark—still a popular year-end target—it will increasingly need to do so on its own merit, not merely on dollar fatigue.
Banxico to cut rates to 8%
Kevin Ford – FX & Macro Strategist
The Mexican peso has gained 1% over the past two days, trading around 18.9 per USD and inching closer to its ten-month high of 18.82 reached on June 16. This rally has been fueled by easing geopolitical tensions in the Middle East and improving inflation dynamics at home, as the mid-June CPI report showed annual inflation at 4.51%, in line with forecasts and down from May’s peak, adding momentum to expectations that Banxico will lower its benchmark rate to 8.0% today.
However, a closer look at the latest Banxico meeting minutes reveals a more nuanced picture. While the May decision to cut was unanimous, the board appears increasingly divided. Two members remain dovish, while two others are signaling more caution, favoring smaller 25bp cuts in future meetings over more aggressive 50bp moves. This suggests that as the easing cycle progresses, Banxico could shift to a slower, more measured pace, especially if inflation proves sticky.
For the Peso, even if after today the central bank opts for another 50bp cut, bringing the Mexico–U.S. rate spread below 400bp, the peso is expected to hold steady. That’s largely thanks to Mexico’s solid fundamentals and relatively low foreign ownership of domestic bonds. Going forward, investors should expect Banxico to adopt a more data-driven, gradual approach, a pivot that underscores the balancing act between supporting growth and anchoring inflation expectations.
Military ambitions, fiscal frictions?
Kevin Ford – FX & Macro Strategist
Prime Minister Mark Carney has not yet committed to NATO’s proposed defence spending benchmark of 5% of GDP, split between 3.5% for direct military expenditures and 1.5% for infrastructure. If implemented, this target could drive Canada’s annual defence costs up to $150 billion, marking a major increase from current levels.
Although the federal government has already raised this year’s defence budget by $9.3 billion to approximately $62 billion, meeting just the 3.5% direct military component would require an additional $45–50 billion annually. The fiscal implications are significant, with higher spending expected to deepen deficits, increase national debt, and necessitate greater borrowing, particularly as income tax revenues decline and election-driven expenditures rise. In general, much of the proposed spending would most likely need to be financed via higher debt issuance.
Amid these domestic pressures, Canada is moving to strengthen international defence partnerships. A new strategic agreement with the European Union grants Canadian firms access to the EU’s $1.25-trillion ReArm Europe initiative, enhancing industrial cooperation and opening new avenues for growth in Canada’s defence sector. Participation in the SAFE program also allows Canada to jointly procure military equipment with allied nations, reflecting a deeper integration into European defence planning.
In FX, the CAD has continued strengthening but has underperformed its G10 peers, as Euro and Pound make new 2025 highs. The EUR/CAD cross has broken above 1.6 and eyes to test decade high at 1.61 on expected EUR overperformance.
Sterling’s reality check
Antonio Ruggiero – FX & Macro Strategist
In similar fashion, GBP/USD climbed overnight—up more than 0.65% from the same time yesterday (8 a.m. GMT). The move was largely driven by a stream of dollar-negative developments, rather than any material resurgence in risk appetite.
Beneath the surface, it’s hard to call this a true “risk-on” environment – one that would typically bolster risk-sensitive sterling. Relative to crisis-driven oil spikes, sentiment appears calmer—but structurally, the outlook remains fragile. Trump’s erratic policy stance is curbing global demand and investment, while domestically, UK wage growth is cooling and economic inactivity is rising, as highlighted by Governor Bailey. A persistently dovish BoE only adds to sterling’s vulnerability.
The pound is also weighed by debt dynamics. The BoE’s ongoing QT has lifted long-end gilt supply, driving yields higher. On top of this, investors are demanding an increasing risk premium to compensate for inflation concerns and fiscal uncertainty. Rising yields in this context do little to support GBP – reflecting stress, not strength. Acknowledging this, Governor Bailey this week signaled that the pace of QT may be reassessed to avoid intensifying these pressures.
This comes at a tricky juncture for Chancellor Rachel Reeves, whose tight fiscal rule limits flexibility. With debt above 100% of GDP and long-end yields near their highest since 1998, debt-servicing costs are rising sharply, compounding downside risks for sterling.
Overall, while geopolitical relief briefly buoyed sentiment, sterling risks now tilt more to the downside: fragile fiscal optics, a weak macro backdrop, and a dovish Bank of England.
Euro and Pound shine on fresh 2025 highs
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: June 23-27
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
