SP500, Nasdaq Hit New Records as Dollar Falls

The US dollar index (DX) continued to trade poorly at multi-year lows on Monday, 1 July, falling to a level last seen in September 2021. Despite earlier optimism surrounding trade tariffs, markets appeared worried about the fiscal uncertainty stemming from US President Donald Trump’s “Big Beautiful Bill” following a Monday vote.

Selling pressure in the dollar due to the ongoing “vote-a–ram” process and Trump’s calls for lower interest rates supported the euro (EURUSD) and spot gold (XAU). In the US, the S&P 500 (ES) and Nasdaq (NQ) both recorded new all-time highs after rising 0.5%, while the Dow Jones (YM) gained 0.6%.

Looking ahead, all eyes remain on Trump’s spending bill and Nonfarm payrolls (NFP) before 4 July and any trade deals ahead of the 9 July deadline. (Source: Reuters)

“Big Beautiful” Spending Bill Raises Fiscal Uncertainty

Major US indices ended the first half of the year on a positive footing as events at Capitol Hill took centre stage on Monday. The S&P 500 and tech-heavy Nasdaq gained 5.5% in Q2, their best quarterly performance since Q4 2023 and Q2 2020, respectively, while the Dow Jones lagged behind at +3.36%. Gains have been supported by trade optimism following the “Liberation Day” crash in April, with the latest catalysts being de-escalation in the Middle East and Trump's tax bill making its way to the Senate.

The Senate began voting on Monday for amendments to Trump’s bill, following a 51-49 vote over the weekend that kicked off debates primarily driven by concerns about cost and cuts to the government’s Medicaid programme. Trump’s bill includes an extension of the 2017 tax cuts at zero cost (via a gimmick known as “current policy baseline”, and is projected to add another $3.3 trillion in debt to the US deficit over the next 10 years. The Republican bill also contains a $5 trillion debt ceiling compared to the $4 trillion of the House bill. 

Despite advancing tax cuts and spending on immigration, border control, and the military, the 940-page bill faces strong scrutiny for its cuts to healthcare ($1 trillion cuts from Medicaid) and for being a ramped-up version of the bills passed in the House last month. Monday’s vote showed a larger Republican majority (53-47) in the Senate, but it was still a narrow margin. To pass the bill, a 60-vote majority is required, suggesting that more amendments and motions will be needed to shift the GOP leaders' view on the current bill. However, some GOP leaders are pushing for “budget reconciliation,” a process that allows the Senate to pass the bill with a simple majority. Vice President JD Vance will cast the final vote. This suggests that even if amendments fail, the bill might still be passed, a win for the fiscal hawks, which appears to have weighed on the dollar and sent US markets to intraday record highs.

Trade-Deal Front Mixed but Overall Positive

On the trade front, Canada walked back its digital services tax in a bid to resume trade talks with the US after Trump suspended them last Friday. The “irritant” 3% tax was imposed by former President Justin Trudeau last year and was expected to come into effect on Monday. However, the current president, Michael Carney, and Trump decided to put the issue behind them after speaking on Sunday, saving American corporations like Amazon (AMZN), Apple (AAPL), and Google (GOOG) billions of dollars. Apple ended Monday 2% higher, but the move was supported by rumours of a potential partnership to power Siri with AI technology. In turn, the two Presidents agreed to resume trade negotiations and reach an agreement by 21 July. Meanwhile, the European Union (EU) is willing to accept a 10% universal tariff, with proper exemptions for its exports to the US. 

But not all trade developments were positive ahead of the 9 July deadline. Treasury Secretary Scott Bessent urged partners to come to the negotiating table, warning them of higher levies as the deadline approaches.  Last week, Trump stated that he would send letters to US trading partners to notify them of such levies, with the temporary 10% tariff potentially surging to 50%. One of the latest partners to receive such a letter is Japan, due to what the US considers “unfair” trade in the auto sector. Trump warned Japan of its reluctance to import US rice as part of a trade deal.

Notably, the dollar traded lower for the majority of Monday's session. However, it managed to pare back some of the losses following the release of poor Chicago PMI data and Bessent’s comments on debt amid the vote on the spending bill. Bessent said on Bloomberg TV on Monday that the government would not ramp up long-term bond sales.

Looking Ahead

As the “vote-a-rama” process of amendments continues into Tuesday, the bill could undergo major changes on the one hand. On the other hand,  history suggests that GOP leaders will eventually surrender to Trump's pressure, who expects the bill by 4 July. However, even if the bill passes through the Senate, more time might be required beyond the deadline. Notably, the tax cuts will expire on 31 December, and the debt ceiling not before August. This leaves trade at the forefront of negotiations this week, along with the release of payroll data on Thursday.

Besides these major developments in the markets, investors have recently taken an interest in Fed Chair Jerome Powell, following Trump’s calls for lowering interest rates. Some traders expect record highs in US equities to continue in the months ahead as Trump called on “Jerome ‘Too Late’ Powell” to reduce rates to 1%. He even went as far as to threaten the Fed Chair with a new “shadow” Chair to sway the board to cut rates before Powell’s term ends in May 2026. Following his attempts, Goldman Sachs (GS) now expects three rate cuts from the Fed this year, compared to just one cut in December previously. 

Meanwhile, across the Atlantic, the European Central Bank (ECB) has cut rates eight times in just the last year. Some analysts believe that if and when the Fed starts to cut interest rates, demand for the dollar may increase. And while the stock market has risen to record levels in the first half, gold saw a 25% gain, its second-best first half since 1976, as safe-haven demand shone amid a loss of confidence in US Treasury bonds. (Source: Barrons)

Conclusion

The dollar is facing challenges at multi-year lows amid fiscal uncertainties and ongoing political ploys surrounding President Trump's spending bill. While major US indices have reached record highs,  weakness in the buck is compounded by concerns over trade negotiations and potential Fed rate cuts.

As we approach critical deadlines for both the spending bill and trade agreements, market participants will closely monitor developments that could influence sentiment, including payroll data and the eventual outcome of the passage of the massive spending bill.

*Past performance does not reflect future results.