Dollar Gains as Trump Backs "Much Bigger" Tariffs
The Bloomberg Dollar Spot Index surged over 0.5%, marking its largest intraday jump in a week, after President Donald Trump expressed support for sweeping tariffs exceeding 2.5%, the initial proposal reported by incoming Treasury Secretary Scott Bessent.
Trump also hinted at potential sector-specific restrictions, including semiconductors, steel, aluminum, and pharmaceuticals. These remarks reignited trade war fears, causing investors to seek safety in the US dollar, seen as a haven asset.
The dollar's gains extend Monday's rally, fueled by the decline in US tech stocks following the launch of an affordable AI product in China.
"The dollar remains strong until proven otherwise," said Kathy Jones, Charles Schwab & Co.'s chief fixed-income strategist. "It could decline eventually, but tariff threats will continue to serve as a bargaining chip."
Investors have been positioning for dollar strength based on expectations that Trump's policies will escalate inflationary pressures and boost US interest rates. Tariffs, if implemented, would further support the currency by reducing dollar outflows due to decreased imports.
The euro and yen weakened against the dollar, while risk-sensitive currencies like the Australian and New Zealand dollars suffered the most among the G-10. US Treasury yields edged higher, reversing the previous day's rally.
Trump also indicated possible tariffs on automobiles imported from Canada and Mexico, following his threats of 25% across-the-board duties effective February 1. The Colombia spat, in which he threatened tariffs to force migrant acceptance, raises concerns about using such measures to coerce nations on non-trade issues.
"Markets have been complacent about tariffs due to lack of action," said Aroop Chatterjee, Wells Fargo strategist. "But as we move closer to implementation, we expect the dollar to benefit."
The dollar rally follows a volatile day for global markets, where DeepSeek's AI progress caused a $589 billion market cap loss for Nvidia Corp. Initially, the news weakened the dollar, but traders later reevaluated the selling pressure.
"Given long positions and US stocks near record highs, profit-taking is understandable," said Leah Traub, portfolio manager at Lord Abbett & Co. "However, 'buy the dip' sentiment remains strong in US equities."
Despite the recent surge, some analysts suggest the dollar's potential for further gains is uncertain. Derivatives traders have reduced bullish bets recently, according to Bloomberg analysis.
"Excessive optimism about the dollar's dominance under Trump may lead to increased volatility," said Shoki Omori of Mizuho Securities. "Positions heavily skewed towards a stronger dollar leave little room for the opposite."