Shares Firm on Hopes for Trade Deals, Dollar Tries to Hold Post-Fed Bounce

Stock markets edged higher this week on hopes that stalled trade negotiations could soon yield breakthroughs, while the U.S. dollar struggled to retain its post-Fed rally amid lingering uncertainty over President Trump’s trade policies. Investors remain torn between optimism about diplomatic progress and anxiety over tariffs’ economic toll, creating a fragile equilibrium in financial markets.

Shares of trade-sensitive companies like Caterpillar and Boeing climbed modestly, reflecting renewed hope that bilateral deals with India, Japan, and South Korea could ease the pressure of Trump’s 10%-plus reciprocal tariffs. The S&P 500 added 0.4% to 4,650, with tech stocks leading gains as AI-driven demand for semiconductors offset concerns about supply chain disruptions.

Trade Talks Take Center Stage

The administration’s push to finalize reciprocal trade agreements before the July 8 deadline has intensified. While no formal deals have been announced yet, progress with India—where Commerce Minister Piyush Goyal held talks in Washington—offers a glimmer of hope. The U.S. and India aim to finalize a Bilateral Trade Agreement (BTA) by autumn 2025, with terms covering tariffs and customs facilitation.

Japan and South Korea are also racing to avoid steep tariffs on automotive and steel exports. Treasury Secretary Scott Bessent hinted at “contours of a deal” with both countries, though analysts caution that verbal commitments lack the enforceability of binding agreements.

Fed Holds Rates Steady, Eyes Trade Risks

The Federal Reserve’s May 7 decision to keep rates at 4.25%-4.5% underscored its cautious stance. While the Fed acknowledged “heightened uncertainty” from trade policies, it avoided immediate action, citing mixed economic signals.

The U.S. economy contracted 0.3% in Q1 2025, with net exports dragging growth by a record 4.8% due to front-loaded imports ahead of tariffs. Yet domestic demand held up, rising 2.5%, suggesting underlying resilience.

The Fed’s reluctance to cut rates despite Trump’s demands reflects its independence. Chair Powell emphasized that policymakers would “wait and see” how trade negotiations unfold before adjusting rates further.

Dollar Struggles Amid Policy Uncertainty

The U.S. dollar index dipped 0.2% to 99.40 this week, its fourth consecutive monthly decline. Investors remain skeptical about the greenback’s long-term prospects amid tariff-driven inflation risks and the Fed’s dovish tone.

The dollar’s weakness contrasts with its 2023 surge, when hawkish Fed policies and trade tensions boosted its appeal. Now, traders are pricing in a 30% chance of a rate cut by year-end, should trade talks falter.

Risks Ahead: Stagflation and Trade Deadlines

Despite market optimism, risks loom large. The Fed warned of stagflationary pressures—high inflation paired with stagnant growth—as tariffs strain supply chains.

With the 90-day tariff pause ending in July, failure to finalize agreements could reignite market volatility. A 50-basis-point spike in 10-year Treasury yields in mid-April—a preview of such turmoil—remains fresh in traders’ minds.

Conclusion: A Delicate Balancing Act

Investors are caught between cautious optimism about trade deals and the very real dangers of tariff-driven stagflation. The S&P 500’s 0.4% gain this week and the dollar’s 4.6% April decline highlight this tension.

With Q1 GDP showing a 0.3% contraction and trade deficits at a record $1.2 trillion in 2024, the stakes for July’s trade deadline couldn’t be higher. If talks stall, expect volatility to return—potentially erasing recent gains. For now, markets are betting on diplomacy, but the Fed’s watchful eye and the dollar’s fragile rebound remind us that hope is not a strategy.

The path forward hinges on whether trade agreements can offset the economic drag of tariffs. Until then, investors should prepare for more swings—and keep one eye on the July horizon.