The Dollar's Rebound: Trump's Tariffs Fuel Inflation Concerns

The U.S. dollar has rebounded after experiencing its steepest decline in 14 months. This recovery is attributed to speculation that President Donald Trump's proposed tariffs will increase inflation and prevent the Federal Reserve from further interest rate cuts.

Currency Market Impact

Trump's announcement of potential 25% tariffs on Mexico and Canada in February has sent currencies of these nations tumbling against the dollar. The dollar gauge rose by 0.7% in Asia following this news.

Fed Outlook

The risk of Trump's high-tariff policy, combined with solid economic growth, is likely to make the Fed cautious about rate cuts, supporting the dollar's strength. However, the extent and timeline of Trump's protectionist measures remain uncertain.

Overnight-Indexed Swaps

Overnight-indexed swaps indicate a 69% chance of the Fed cutting interest rates more than once this year, up from 46% on Friday. SMBC Nikko Securities and Nomura Securities anticipate further declines in U.S. yields.

Treasury Market

Treasury yields have rallied as global cash trading resumed, primarily due to Trump's decision not to impose China-specific tariffs on his first day in office.

Asian Currency Reactions

The offshore yuan has depreciated by 0.4%, affecting risk-sensitive currencies like the Australian and New Zealand dollars. The People's Bank of China has strengthened the yuan reference rate, indicating support for the currency.

Volatility in Currency Market

Alvin Tan of RBC Capital Markets expects continued volatility in the currency market due to Trump's off-the-cuff remarks. "He likes to pontificate, but he doesn't always follow through on his comments," Tan said. "But the market cannot ignore them either."

Key Takeaways

* The dollar has rebounded after a significant decline due to concerns about Trump's tariff plans.
* The Fed is likely to remain cautious about rate cuts amid the potential for inflation.
* The extent and timeline of Trump's protectionist measures remain uncertain.
* Treasury yields have rallied, but Asian currencies have been impacted by the yuan's depreciation.
* Volatility in the currency market is likely to continue due to Trump's unpredictable statements.