Tariff Tensions Send Dollar Soaring
The US dollar strengthened against major currencies on Tuesday, as traders scrambled to respond to the latest tariff threats from the Trump administration. This sudden shift in market sentiment came on the heels of Monday’s risk-off moves, sparked by the emergence of a low-cost Chinese artificial intelligence model.
A New Era of Trade Uncertainty
President Trump’s announcement on Monday that he plans to impose tariffs on imported computer chips, pharmaceuticals, and steel sent shockwaves through the markets. This move is seen as a bid to encourage producers to manufacture these goods in the United States. The news came just a day after the US and Colombia narrowly avoided a trade war, when the White House announced that the South American nation had agreed to accept military aircraft carrying deported migrants.
Universal Tariffs on the Horizon?
According to a report by the Financial Times, Trump’s pick for Treasury secretary, Scott Bessent, has been pushing for universal tariffs on US imports, starting at 2.5% and rising each month. This development has contradicted market assumptions that tariffs would be implemented on a case-by-case basis, rather than universally.
Inflation Fears Boost Dollar
Expectations that tariffs will drive up inflation have led to a scaling back of US rate cut bets, boosting the dollar in the process. The euro fell 0.6% to $1.04245, while sterling dropped 0.46% to $1.2443. The Canadian dollar also eased 0.15% to 1.4395 per US dollar.
Tariffs Take Center Stage
Trump has threatened to impose 25% duties on imports from Canada and Mexico on February 1, and has also vowed to hit the EU and China with tariffs. The dollar index, which measures the US currency against six rivals, recovered 0.1% to 107.91, after plummeting to its lowest level since mid-December at 106.96 the previous day.
Risk-Off Moves Reversed
As traders focused on the implications of tariffs, they began to reverse some of the large risk-off moves made on Monday. The yen, which had surged to its highest level since mid-December at 153.715 per dollar on Monday, slid back as safe-haven bids eased. Against the yen, the dollar traded up 0.8% at 155.73 yen.
Fed Meeting Looms
The Federal Reserve’s two-day meeting begins on Tuesday, where it is expected to keep interest rates steady. Investors will be watching closely for any hints on whether a rate cut could happen soon if inflation eases closer to the central bank’s 2% annual target. Money markets currently expect the Fed to cut rates by around 48 basis points this year, but don’t price in a cut until June.
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