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The US dollar fell on Monday after reports that president-elect Donald Trump’s administration is considering watering down a campaign pledge to apply sweeping tariffs on imported goods.
The dollar index, which tracks the currency against a basket of six peers, initially fell more than 1 per cent after The Washington Post reported that potential tariffs might be confined to critical imports.
In November, Trump had threatened blanket 10 or 20 per cent duties on all trading partners.
However, the greenback pared its losses to 0.7 per cent later in the day, after Trump denied the report, describing it as “fake news”.
The euro, which had initially climbed as much as 1.2 per cent to $1.043 in the wake of the report, gave up some gains to trade at $1.039 following the president-elect’s denial.
The pound, which was the best-performing G10 currency against the dollar last year, earlier rose as high as $1.255 before slipping to $1.252.
The report that tariffs would be scaled back had sparked a “relief rally” in the euro against the dollar, with hopes that the region’s carmakers could be spared levies, said Chris Turner, global head of markets at ING. The tariffs might also “be less inflationary than first expected”, he added.
Monday’s report triggered “some relief among investors that the initial tariffs won’t be as bad as feared”, sparking a “sharp reversal of recent US dollar gains”, said Lee Hardman, senior currency analyst at MUFG. More focused tariffs would help “to dampen [their] disruptive impact”, he added.
US government bonds, which have sold off in recent months as investors girded for higher inflation driven by broad tariffs, were little changed. The yield on the two-year US government bond, which moves with rate expectations, was down 0.01 percentage points at 4.27 per cent.
The weakness in the dollar comes after a strong rally for the world’s de facto reserve currency that began in early October as the market began to price in a greater prospect of a Trump election win. “The market had correctly anticipated a Trump victory,” said Jane Foley, senior FX strategist at Rabobank.
Analysts and economists expect Trump’s pro-growth, potentially inflationary policies to limit the number of times that the US Federal Reserve will cut interest rates this year, boosting demand for the dollar relative to other major currencies. This was compounded by investor bets that the negative growth impact for the Eurozone would prompt the European Central Bank to cut rates more aggressively.
In mid-December, the Fed published economic forecasts that suggested rates would fall in 2025 by less than previously hoped. Last week, a top Fed official warned about the threat of resurgent US inflation after Trump takes power.
Investors expect the US central bank to cut rates at least once this year, with a 60 per cent chance of a second quarter-point cut.
Expectations of rate cuts by the ECB were slightly pared back, with just under four quarter-point cuts priced in this year.
