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Dollar Drops Amid Reports of Narrower Tariffs Under Trump

Monday 06 January 2025 - 16:35

LONDON, Jan 6 – The dollar fell by 1% on Monday following a report suggesting that President-elect Donald Trump might implement tariffs targeting only critical imports, offering potential relief to countries bracing for more extensive levies.

Reports indicated that Trump's team was considering tariffs applied across all nations but limited to sectors deemed vital for national or economic security. This news led to a sharp drop in the U.S. dollar index, which fell to 107.86—a significant decline from its 109.54 peak on Thursday, a level not seen in over two years.

In recent months, expectations of widespread tariffs under Trump’s administration have weighed on global currencies such as the euro and China’s yuan, pushing the dollar higher. However, Monday saw a shift, with the euro climbing 1.13% to $1.0433, marking its highest level in a week.

“This initial market reaction suggests some relief among investors,” said Lee Hardman, senior currency strategist at a Japanese bank. “It seems the first phase of tariff hikes under Trump’s leadership might not be as extensive as feared, prompting a pullback in the dollar’s strength observed recently.”

China’s yuan also gained ground, with its offshore value rising 0.5% to 7.325 per dollar. The onshore yuan, however, remained under pressure, closing at a 16-month low of 7.315, partly due to concerns about Trump’s trade policies.

Other currencies showed gains as well: the British pound rose 0.95% to $1.2542, the Australian dollar climbed 1.13% to $0.6284, and the U.S. dollar weakened 0.96% against the Canadian dollar.

Economists warn that broad tariffs could drive up U.S. inflation, potentially limiting the Federal Reserve’s ability to cut interest rates, which would keep bond yields elevated and support the dollar.

Investors are also awaiting Friday’s U.S. non-farm payrolls report for December to assess the strength of the economy. Additionally, a series of Federal Reserve policymakers are scheduled to speak this week, likely reiterating the ongoing challenge of controlling inflation.