Dollar Firms Amidst Trump's Tariff Plans and Fed Interest Rate Expectations
The US dollar strengthened on Monday as market participants weighed the implications of President Donald Trump's tariff initiatives. The announcement of impending tariffs on Colombia reignited concerns that had subsided last week.
The Mexican peso, a bellwether of tariff worries, depreciated 0.8% to 20.426 per dollar in early trading. The Canadian dollar also lost ground, trading at $1.43715.
The euro declined 0.14% to $1.0474 ahead of the European Central Bank's policy meeting, where a rate cut is expected. Sterling stood at $1.24615.
The US dollar index, which measures the dollar against six major currencies, remained near its one-month low at 107.6.
Investor focus this week remains on central banks and the potential response to President Trump's request for interest rate cuts. The Federal Reserve is anticipated to maintain rates during its meeting on Wednesday. However, investors will scrutinize any indications of a possible rate cut in March if inflation continues to decline towards its 2% target.
Data released on Friday revealed a slowdown in US business activity and increased price pressures in January. Meanwhile, existing home sales rose to a 10-month high in December.
Kyle Chapman, FX markets analyst at Ballinger Group, suggested that the labor market is heating up, supporting the Fed's decision to pause rate increases for an extended period.
Elsewhere, the Australian and New Zealand dollars remained near their one-month highs but posted slight declines. The Japanese yen appreciated almost 0.4% to 155.41 per dollar on Friday following the Bank of Japan's interest rate increase to the highest level since 2008.
BOJ Governor Kazuo Ueda indicated further rate increases as wage and price growth expands but provided limited guidance on the timing and magnitude of future hikes.
Mark Dowding, chief investment officer at RBC BlueBay Asset Management, believes that the renewed focus on the "Japan story" could drive yen appreciation in the coming weeks. He emphasizes the undervalued status of the Japanese currency and anticipates its performance to improve in 2025 as interest rate differentials narrow.