Dollar downside limited by yields and risk

The US dollar starts Tuesday on firmer footing. US equities slipped into the close, with the S&P 500 down 0.2%, as gains in chip stocks failed to offset pressure from the US-Iran conflict. Higher US yields and geopolitical tension gave the greenback a modest bid. That mix would normally weigh more heavily on higher-beta and risk-sensitive currencies, but Monday’s adjustment was contained. The broader takeaway is that markets are no longer trading only on last week’s softer CPI and PPI prints.

Treasuries remain central to the dollar story. Yields rose again Monday, with breakevens, real yields and term premiums all contributing to the move. Last week’s dollar pullback rested on the idea that softer inflation would reduce near-term Fed hike risk and pull front-end yields lower. Fed Chairman Kevin Warsh’s pushback against a “mission accomplished” reading of the data has kept markets cautious. Inflation still argues against more tightening, but rates are not sending a clean bearish signal for the dollar.

With little macro data and no Fedspeak this week, direction should depend on which impulse dominates. FX markets are taking cues from the Middle East, oil and the earnings tape, while volatility is expected to stay subdued. If geopolitical risks fade and crude stabilizes, softer inflation should leave the dollar more exposed as markets lean further away from Fed tightening. If oil keeps rising, especially above $90 a barrel, or earnings spark a broader risk-off move, the dollar could hold its bid through both inflation-risk repricing and safe-haven demand. For now, the data story points mildly lower for the dollar, but geopolitics and equity sentiment are limiting the downside.

A new wave of tariffs coming to Canada?

President Trump signed three Section 338 proclamations on July 20 imposing additional 50% tariffs on certain Canadian goods, aimed at Canada’s treatment of US autos, alcohol, and dairy, with the measures set to take effect in 30 days. The White House says the tariffs apply to covered goods even if they qualify under USMCA (CUSMA), while energy, potash, Section 232-covered products, fish, critical minerals, and certain other goods are excluded. In that sense, this looks less like a break and more like a high-pressure negotiating tactic designed to bring Canada back to the table.

That does not mean the threat is harmless. Over the last 17 months, Canada’s approach to President Trump’s tariff agenda has delivered limited relief, while the economic burden has fallen more heavily on Canada than on the US. The Bank of Canada has been explicit that US tariffs and trade uncertainty have pushed Canadian activity onto a lower path, weighing on exports, investment, hiring, and business confidence, while the US economy has remained comparatively more resilient. That is the central argument in our CUSMA report: the real cost is not always the tariff itself, but the uncertainty that delays capex, weakens confidence, and keeps a risk premium embedded in Canadian assets.

Canada often explains its economic struggles through an external lens: tariffs, geopolitics, energy shocks, and US policy volatility. Those forces are real, but they do not tell the whole story. The Bank of Canada’s own analysis points to deeper domestic vulnerabilities, including weak business investment, poor productivity, soft labour conditions, and heavy dependence on the US market. A durable CUSMA extension may require Canada to move beyond a defensive posture and address some of the sensitive issues Washington has now put back on the table, including autos, alcohol, and dairy.

Prime Minister Carney’s response appears to favour dialogue over escalation, with Canada arguing that the tariffs violate CUSMA while signalling that it remains ready to engage intensively and has already offered proposals to modernize the trade deal. That is probably the right tone, but it also highlights the asymmetry: Washington is using tariff pressure to force movement, while Canada is trying to preserve the framework through negotiation.

For now, USD/CAD continues to follow the broader dollar tape, largely shrugging off the familiar pattern of tariff threats followed by partial backpedalling. With low volatility marking the start of the week in FX markets, the next month is less about whether the tariff clock actually reaches zero and more about whether Canada can turn dialogue into concessions that stabilize confidence before markets price in another round of policy risk.

It’s not always about the dollar

USD/MXN is starting the week on a softer footing despite a firmer dollar backdrop, underscoring that a stronger greenback does not automatically translate into weaker EM FX. The peso has moved from around 17.50 to 17.37, leading LatAm FX with a roughly 0.8% gain. The dollar is still finding support from higher US yields and geopolitical risk, but that has not been enough to break the peso’s carry appeal.

The key difference is volatility. When FX volatility is compressed, the cost of holding carry trades falls and investors are more willing to stay in higher-yielding currencies. That backdrop has helped the peso, especially with macro conditions still stable enough to keep investors comfortable holding exposure. In other words, the peso is not ignoring the dollar; it is being supported by a better risk-adjusted carry setup.

This is also why USD/MXN continues to trade differently from USD/CAD. As mentioned in our CUSMA report, CAD has been more exposed to trade uncertainty and the tariff premium, while MXN has remained more anchored by carry demand and Mexico’s relative position within the North American manufacturing story. As long as volatility stays subdued and the macro backdrop does not deteriorate materially, the peso can continue to absorb a modest dollar bid better than other higher-beta currencies. The risk is that this setup depends heavily on calm markets.

Market snapshot

Table: Currency trends, trading ranges & technical indicators

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Calendar: July 20-24

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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.