Dollar Weakens After Trump's Measured Tone on Tariffs

The US dollar extended its losses on Tuesday after President Donald Trump hinted at a gradual and targeted approach to imposing tariffs. This news provided significant relief to trade-sensitive currencies.

During his inauguration speech, Trump declared a focus on immigration, energy, and a more assertive foreign policy. However, his remarks on tariffs were brief and lacked specific details.

"While tariffs may not be off the table, Trump's tone suggests a more measured and selective approach," said Taylor Nugent, a senior markets economist at National Australia Bank.

Currency markets reacted swiftly, with the US dollar index (DXY) plummeting by 1.2% on Monday, marking its steepest daily decline since late 2023. The DXY currently stands at 108.060, hovering above support around 107.70.

The euro surged to $1.0416, gaining 1.4% overnight and testing resistance at $1.0435. The EU's significant trade surplus with the US made it a potential target for Trump's trade measures.

Similarly, the absence of specific tariff announcements for China led to a 1.0% decline in the dollar against the yuan to 7.2642 in offshore trading.

Export-dependent currencies such as the Australian and New Zealand dollars advanced by approximately 1.5%.

The dollar's performance against the Japanese yen was relatively stronger, dropping only 0.4% overnight to 155.63. The yen had already appreciated last week due to expectations of a rate hike from the Bank of Japan on Friday.

Initial reactions in US rate markets were muted, partially due to the Martin Luther King Jr. Day holiday. Concerns over a combination of tariffs, immigration restrictions, and tax cuts had previously raised inflation fears.

Markets still do not anticipate another Federal Reserve rate hike until June or July and expect around 40 basis points of easing by year-end. 10-year Treasury yields are expected to dip from 4.623% when Tokyo trading resumes, with futures indicating a 4.59% start.

"Numerous developments will shape market sentiment this week," noted analysts at ANZ. "If trade and immigration policies do not significantly disrupt supply chains and the labor force, financial markets may reduce some of their recent inflation caution."

Trump's endorsement of cryptocurrencies contributed to Bitcoin reaching a record high of $109,071.86 on Monday before settling back to $103,791.