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Dollar drops as the trade deal sugar rush fades

The dollar and global stock markets lost momentum on Tuesday as investors' concerns about the impact of a trade standoff between the United States & China on the global economic situation grew.

The two biggest economies in the world have agreed to a 90-day truce in their trade dispute. They will lower tariffs on both sides and remove other restrictions while they work out a permanent agreement.

The agreement reignited investors' appetite for stocks and commodities. Wall Street saw a 3.3% rise the day before.

On Tuesday, the enthusiasm for European stocks had diminished. They were up only 0.2% at first trading. This was boosted by positive corporate results, such as those from German pharma company Bayer and Danish wind-turbine maker Vestas. Both rose 10%.

Futures for the S&P 500, Nasdaq and Dow fell by 0.4%. This shows the caution in the U.S. market.

It's the pause which refreshes you and makes you feel good. You hope there will be more. This does prove that the current administration is not immune from market volatility. Chris Beauchamp, chief market strategist at IG, said that the market has reached a breaking point.

After the Geneva talks, both the U.S. and China announced that they would reduce tariffs on Chinese imports from 145% to 30%.

The ratings agency Fitch estimates that the U.S. tariff rate has dropped to 13.1% from 22.8% before the agreement, but is still above the 2.3% at the end 2024.

The U.S. Government went further on Tuesday and announced that it would cut the "de minimis tariff" on Chinese shipments up to an amount of $800.

This latest concession by the United States was not met with much reaction from the broader market. Amazon shares fell 0.5% on premarket, after Monday's 8% gain.

FAREWELL "CRAZY US EXCEPTIONALISM"?

Trump's unpredictable attitude towards the economy, international diplomacy and trade has fueled concern over the outlook for U.S. economic growth. These factors, along with the lack of progress made in negotiating trade deals, have driven investors away from U.S. assets, resulting in a move to safe-havens such as gold, the Japanese currency, and the Swiss franc.

Economists and fund managers have stated that the 90-day break is welcomed, but it hasn't changed the larger picture.

Christopher Hodge said that the tariffs would still be higher after all was said and done and this will have a negative impact on U.S. economic growth.

On Monday, the dollar rose against a basket currency by more than it had in any day since April 22, 2007. On Tuesday, the dollar's gains had waned and most major currencies were stronger.

The dollar fell 0.4% to 147.88 and the pound increased 0.2% to 1.3207.

"You can still sense that people are generally thinking that we will put more money to work in the U.S. for the time being, but that we won't go back to the crazy "U.S. The December exceptionalism trade was that whatever you did, it had to be done in the US. Beauchamp, IG's Beauchamp, said that we've got be a little more circumspect.

Investors will now focus on the U.S. inflation figures on Tuesday.

Traders have reduced their expectations of Federal Reserve rate reductions due to the shift in U.S. China trade relations. They believe that policymakers will be more flexible if inflation risks decrease.

The traders are now pricing 58 basis point cuts for this year. This is down from the over 100 basis point reductions that were priced in during the peak of tariff-induced panic in mid-April.

The benchmark 10-year Treasury yield is flat at 4,453%.

Oil prices were stable on Tuesday after rising 1.2% on Sunday to a 2-week high of $65 per barrel. Gold was around $3,260 per ounce after falling 2% on Sunday as investors abandoned some safe havens.

(source: Reuters)