Market Volatility: Dollar Slumps Amid Tariff Uncertainty
The US dollar has plummeted to a two-week low, as investors struggle to make sense of President Donald Trump’s tariff plans. The lack of clarity has sent financial markets into a tailspin, with the greenback failing to regain ground against major currencies.
Trump’s Tariff Threats
On Tuesday, Trump announced that his administration was considering imposing a 10% tariff on Chinese goods, effective February 1. He also threatened duties on European imports, although details remain scarce. This uncertainty has left investors on edge, causing the dollar to slide 1.2% against a basket of major peers.
Dollar Index Takes a Hit
The dollar index, which tracks the currency against six top rivals, touched its lowest point since January 6 at 107.75 on Wednesday. Although it stabilized briefly, it ultimately ended the day down 0.15% at 107.97. According to Deutsche Bank’s Jim Reid, “Tariffs have again grabbed the headlines overnight as Trump commented in the evening that his threat of a new 10% tariff on China was still on the table…”
Currency Market Reactions
The euro initially fell 0.3% in early trading but later rose to $1.0457, its highest point since December 30. Sterling hit a two-week high against the greenback, although it later retreated to $1.2351. The Canadian dollar weakened slightly to 1.4346 per US dollar, while the Mexican peso gained about 0.3% to 20.547 per dollar.
Inflation Concerns
Analysts believe that Trump’s policies on immigration, tax, and tariffs will likely boost growth but also lead to inflation. However, the more cautious tariff approach has fueled hopes that inflation risks could be more limited. Traders expect a quarter-point Fed interest rate cut by July, with another reduction by year-end considered a possibility.
Yuan Holds Steady
China’s yuan held steady at 7.272 per dollar in offshore trading, after reaching its strongest level since December 11 on Tuesday. According to Alvin Tan, head of Asia FX strategy at RBC Capital Markets, “A 10% tariff on China imports would be far below the 60% rate he mentioned in his campaign… Altogether, these suggest that the US dollar could drop further.”
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