Dollar Weakens as Traders Assess Trump's Tariff Plans

The U.S. dollar dipped to a near one-week low against major currencies on Tuesday, as market players weighed the potential impact of President-elect Donald Trump's proposed tariffs. This shift in the currency market comes amid speculation that Trump may not implement the aggressive tariffs he initially promised.

Over the previous day, the dollar experienced a notable decline against both the euro and the British pound, driven by a Washington Post report indicating that Trump's advisors were contemplating tariffs primarily on sectors deemed critical for national security. In a twist, Trump later took to his Truth Social platform to deny the claims, which provided a slight rebound for the dollar.

As of 0730 GMT, the U.S. dollar index, which measures the greenback against a basket of currencies including the euro and pound, fell by 0.25% to 108.03, having reached a low of 107.74 overnight—the weakest level since December 30, 2022. Earlier in January, the index had jumped to a high of 109.58 amid optimistic expectations regarding Trump's fiscal policies, regulation rollbacks, and tariff hikes aimed at stimulating the American economy.

Market analysts suggest that Trump’s 10-20% universal tariffs were always subject to skepticism, and the recent Washington Post reporting may have solidified this notion, even as Trump attempts to downplay the situation. Chris Weston, head of research at Pepperstone, emphasized that Trump aims to maintain his credibility ahead of upcoming negotiations.

Investors are keenly waiting for the U.S. JOLTS job openings data and the ISM Services index for December, which could further influence market sentiment.

Trump's tariff threats have notably targeted the eurozone, contributing to the euro experiencing a bounce back. The currency rose by 0.16% to $1.0407, recovering from a previous peak of $1.0437. ING's Chris Turner noted that despite Trump's rebuttal of the tariff speculation curbing the euro’s gains, uncertainty around the tariffs might prompt a correction in the dollar’s recent strength. He reiterated a forecast predicting a gradual decline towards 1.02 for the euro against the dollar throughout 2023.

Later in the day, investors will also focus on euro area inflation data, with many analysts predicting an uptick to 2.5% year-on-year from 2.2% in the previous month.

On the other side of the Atlantic, the British pound gained ground, rising 0.14% to $1.25395, while the dollar edged up 0.09% against the yen, reaching 157.46 yen. This includes a brief climb above 158 yen, the first time since mid-July, buoyed by rising U.S. Treasury yields.

The Australian and New Zealand dollars also made gains, with the Aussie up 0.46% to $0.6275 and the kiwi increasing 0.66% to $0.5681, as risk appetite in the market regained prominence.

In the cryptocurrency market, Bitcoin remained stable at approximately $101,781, maintaining its highest value since mid-December, as investors continued to navigate the ongoing volatility in traditional markets.

As traders keep a close watch on economic indicators and geopolitical developments, the dollar's performance remains crucial for both the domestic and global markets. What will happen next? Stay tuned for more updates!