Dollar Weakens on Reduced Trade War Risk

The U.S. dollar has declined against most major currencies as traders reassess the likelihood of an imminent trade war.

The Bloomberg Dollar Spot Index fell 0.4% to its lowest point in over a week, continuing its retreat from a two-year high reached earlier this week. Traders are adjusting their expectations for the dollar after President Trump delayed tariffs on Mexico and Canada.

This shift has refocused attention on market fundamentals, with weaker-than-expected US jobs data contributing to increased bets on interest rate cuts.

"The broad US dollar weakness continues as hedges against near-term tariffs are unwound," said Jordan Rochester, head of FICC strategy at Mizuho. "A one-month delay means it's just not worth paying for right now."

For those hoping for a resurgence in the dollar, signs of continued US economic outperformance will be key. Later today, traders will receive updates on the labor market and government debt issuance plans.

Despite the pullback, investors remain bullish on the dollar, maintaining their net long position in CFTC data for the week ending January 28.

The Japanese yen has experienced the most significant gain against the dollar on Wednesday, driven by positive wage growth figures. This has boosted expectations for further interest rate hikes by the Bank of Japan, narrowing the US-Japan rate differential to its lowest level in four months.

"The major feature of the FX market has been the surge in the yen following strong wage figures," said Cameron Crise, Macro Strategist at Bloomberg. "My model suggests that USD/CAD is now pricing in 5.6% tariffs, the lowest reading since early December."

The yen has risen 1% to 152.76 per dollar. Other export-sensitive currencies, such as the New Zealand and Taiwanese dollars, have also strengthened amid reduced concerns over a global trade war.

"The dollar's weakness reflects the perception that Trump will primarily use tariffs as a negotiating tool rather than escalating into trade wars," said Charu Chanana, chief investment strategist at Saxo Markets.