July seventh, two thousand twenty-five

I. Foundation 

resistance to change and hence greater dependability for the results shown in the past.

II. Insights 

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The sixth month of broad dollar weakness: the second half of the depreciation trade

So far, the trade-weighted dollar index has fallen nearly 7% over the past 6 months, a move comparable to several major dollar depreciation cycles over the past 40 -50 years, Across these cycles, the dollar’s trajectory during the first 6 months was quite consistent: each began with rapid depreciation, followed by a gradual flattening.

Figure: Historical dollar cycles

1. A notable example is 2009:

Figure: Reuters report from 2009 5

Figure: The dollar falls while the S&P continues to rise

By 10, the dollar had fallen to its lowest level in more than a year at the time, and the euro–dollar exchange rate broke through 1.5. However, the subsequent decline in the dollar was not as severe as the market feared.

“During the summer, the dollar’s depreciation momentum looked extremely rapid, and at the time people feared it might fall even faster to lower levels... Now we can see that this did not really happen. Over the past six months, all we have witnessed is the dollar gradually returning to its pre-crisis level.”

2. However, the sharp dollar depreciation in 1985 was an exception:

This depreciation also began with the dollar valuation about 20% above fair value (much like today), but the key point is that even after the first six months, The Federal Reserve’s policy rate was still moving downward, the two-year U.S. Treasury yield was falling, and key spreads such as the U.S.–Europe rate differential were also narrowing, supporting a more prolonged depreciation trend.

3. At present, we are about to reach a key point in this dollar downturn

Over the past two or three months, the dollar has weakened even though interest-rate differentials remained relatively high:

This was caused by investors holding U.S. assets adjusting their hedge ratios and reallocating positions (see our earlier discussion of dollar hedging). It was the central focus of the dollar-down trade in the preceding months, and the reason we selected the euro as our main trading pair over the past period: the euro is the key proxy in dollar-hedging trades.

But Over the past two weeks, the relationship between the dollar and interest-rate expectations has strengthened again—especially as the market has repriced its bets on Fed easing.This means If the Fed begins a genuine rate-cutting cycle in the coming months—for example, starting in 9 and continuing to cut rates through the year—that will be a key catalyst for the dollar’s depreciation trend to “continue advancing.” Conversely, without this accompanying decline in rates, the dollar may fall into the kind of “relatively flat, gradual decline” often seen historically.

The key to a consistent dollar depreciation trend is whether, starting today, the Fed pushes short-term rates lower still, narrowing the rate differential with other economies.

Whether the trading path follows 1985 or 2009 has now reached a critical point.

4. So, against the backdrop of the Fed’s genuine shift toward easing, which asset classes will benefit the most?

Figure: Weekly Wrap 250629

Fed easing is generally positive for emerging-market assets, Even without actual rate cuts this year, EM assets have had one of their strongest starts in recent years: EM local-currency bonds are up by double digits, and EM stocks are up nearly 15% in the first half of the year.

This shows that structural support factors are already very strong even without the Fed. If we now add the possibility of Fed rate cuts, the backdrop for emerging markets is almost a perfect tailwind.

Likewise, from an allocation perspective, if the global cycle remains resilient and the Fed cuts rates because inflation is moderate or its reaction function has changed, then more cyclical EM assets should also perform best, such as EM equities and high-yielding currencies. These assets often perform very well in a “strong cycle + Fed easing” environment.

Figure: Weekly Wrap 250707

If Fed rate cuts coincide with “growth remaining resilient,” the Korean won should stand out. As a low-interest-rate economy, South Korea’s won will be a core focus during a potential dollar-down cycle in the second half of the year. Pairing it with Korean equities is a good approach, especially given domestic catalysts such as ongoing improvements in corporate governance.

Even against a backdrop of relatively weak growth, Fed rate cuts still benefit low-yielding EM currencies—such as those of Asian export-oriented economies. Lower U.S. short-term rates will change these economies’ foreign-exchange receipts and payments and hedging structures. Likewise, from the perspective of local rate markets, Fed rate cuts would provide more policy room. In particular, with “a weaker dollar + lower oil prices + easing inflation,” the central banks of EM would also have more room to act.

Finally, old friends: the Brazilian real and Brazilian equity indices:

Figure: BRL

Figure: Brazilian equity index

2025.07.07

The moderate cooling scenario

At the end of last week, we briefly commented on the U.S. employment report. Since that discussion was paired with our currency-position analysis, we focused mainly on foreign-exchange markets. Today, we’ll take a broader look and discuss the scenario of moderate cooling in the U.S. economy behind the data.

To sum it up in one sentence:This is a better-than-the-market’s pessimistic expectations employment report, but it cannot be called “strong”..，Behind data that still look reasonably decent overall, there are indeed signs of some weakness within the report.

1) The market’s first focus is employment growth:Government departments accounted for nearly half of this month’s employment growth, and these new government jobs were concentrated mainly in hiring by state and local education systems. Our assessment is that There may be seasonal distortions in this, which means the data could show a payback effect over the coming months—that is, some of these added jobs may be reversed.

2) If we exclude government departments and look only at private-sector job gains, they do indeed show that growth is continuing to slow:From a seasonal-adjustment perspective, employment growth will also face greater challenges over the next few months, so the overall nonfarm payroll figures are unlikely to look as strong as they did over the past few months.

3) However, This slowdown is not necessarily concerning...because the labor market’s current break-even rate of employment growth—that is, the minimum number of new jobs needed to keep the unemployment rate stable—is moving lower. A key factor behind this is slower immigration, which is moderating labor supply growth.

Chart: Weekly Wrap 250608

This means that As long as monthly job gains remain around the trend level of 10 hundred thousand, that will be enough to keep the unemployment rate at its current level.The household survey also shows a slight decline in the unemployment rate, indicating that despite the slowdown in nonfarm payrolls, the situation is not serious from the standpoint of unemployment.

Overall, then, this is not a good-looking report, but it is not bad enough to warrant panic. Taking both the headline figures and the underlying weakness into account, it is not a report that inspires confidence, but neither is it the kind of disastrous jobs report the market feared.

For the Fed, the most direct conclusion from the data is that it rules out the tail risk of an emergency rate cut in 7.

In other words, this report is enough to dispel the possibility of being forced to cut rates in 7 because of a collapse in employment data. Whether rates are cut next will depend entirely on the combined picture from all future economic data. This also means the market and the Fed will continue to focus on how employment reports and inflation data interact, rather than making a judgment based on just one data point.

This is still a process of gradual cooling, not a scenario of rapid deterioration.

Chart: Unemployment Rate Logic and Credit Assets

However, it is worth noting that there is a rationale for the Fed’s rate-cutting path to begin earlier and proceed faster:

Judging from the tariff effects that have already taken hold, the monthly data showing their pass-through to inflation have been noticeably a little milder than expected, easing our concerns about inflation persistence.Even with tariff-related volatility, the absolute magnitude of inflation is not excessive, allowing us to shift our attention to other components of inflation.

As for core inflation, after excluding tariff effects, underlying inflation has fallen substantially, and major indicators such as housing inflation have returned to levels consistent with the 2% target.So, if the market absorbs the tariff impact and underlying inflation is also significantly more moderate, normalization of the policy rate—that is, the start of rate cuts—can begin earlier.

In this environment, the Fed has reason to return to the neutral rate faster. Combined with signs of a slowing labor market, the nonfarm payrolls report slightly reduced the urgency for rate cuts, but overall it still supports a path of starting rate cuts in 9.After all, a lot of data will be released between now and 9, and only a marginally softer inflation reading and somewhat weaker employment would be enough to bring this path about—the specific ways this could happen are numerous.

Add at the end, on the data:

ADP is very poor at forecasting nonfarm payrolls… The main reason is that nonfarm payrolls themselves do not reflect actual changes in employment very well.

2025.07.07

III. Market Pulse 

Our latest Comments on the economic and market environment

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