Synopsis:

MUFG expects the US dollar to see only modest gains following signs of tariff de-escalation, citing lingering investor caution, skepticism about US policy stability, and shifting yield dynamics—especially favoring the yen medium-term.

Key Points:

• Tariff Optimism Priced In:
  Positive US comments on de-escalation have boosted the dollar, but FX reaction likely capped, with much of the optimism already reflected in markets.

• JPY Outlook Improving:
  Despite near-term underperformance, the yen is structurally supported by rising JGB yields (30Y at 25-year high near 3%) and reduced incentives to hedge USD exposure.

• Dollar Headwinds Remain:
  Even if tariffs ease, damage to investor confidence and global positioning has already occurred. Any rebound in risk appetite will likely be measured.

• Policy Credibility in Question:
  Given the unpredictability of President Trump’s trade policy approach, investors are likely to remain cautious in interpreting any deal headlines.

Conclusion:

While trade optimism has offered a short-term lift to the USD, MUFG sees the scope for further gains as limited, with investor skepticism, structural yen support, and policy uncertainty capping broader dollar upside.