Dollar Retreats Amid Trade Tensions and US Inflation Data Await
The US dollar has pulled back from its tariff-driven rally, standing below recent highs as market participants anticipate inflation data and developments on the trade front.
On Wednesday, the dollar gained 0.3% against the Japanese yen, surpassing 153 for the first time in a week. However, it traded with modest losses against other currencies, hovering at $1.0357 per euro.
The European Union, Mexico, and Canada have condemned President Trump's tariffs on steel and aluminum imports, prompting threats of countermeasures from EU chief Ursula von der Leyen.
Federal Reserve Chair Jerome Powell reaffirmed the Fed's cautious stance on interest rate cuts in his testimony to Congress.
The euro strengthened by 0.5% on Tuesday and maintained its stability. Sterling rose 0.7% to around $1.2441. The Australian dollar gained 0.3% to $0.6294.
Analysts believe that while tariffs may benefit the US dollar in the long run, their inflationary impact remains uncertain. The markets have recently been heavily bullish on the dollar, making it susceptible to any unexpected shifts in sentiment.
"I don't see any clear catalyst," said Imre Speizer, currency strategist at Westpac. "Markets could react strongly to the upcoming US inflation data."
Reuters' poll indicates a slight rise in January's core CPI to 0.3%, while businesses anticipate tariff-related price increases.
A rate cut in the US is not fully priced in until September, with only 35 basis points expected for the year. "Stronger inflation could further push out rate cut expectations," said Speizer.
Market data shows that net US dollar long positions against other G10 currencies stood at around $31.5 billion last week.
The Canadian dollar, affected by tariffs, remained resilient near its strongest levels for the year at C$1.4293 per US dollar. Despite threats of additional levies, the Mexican peso and other emerging market currencies continue to face pressure, trading close to recent lows.