(Bloomberg) — The dollar bounced back after posting its steepest drop in 14 months amid bets that US President Donald Trump’s tariff plans would spur inflation and prevent further interest-rate cuts from the Federal Reserve.
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Bloomberg’s dollar gauge rose as much as 0.7% in Asia Tuesday after slumping in New York trade as Trump said he may enact 25% tariffs on Mexico and Canada in February. Currencies of the two nations fell more than 1% against the greenback before paring the move.
“If 25% tariffs on Mexico and Canada are coming, then surely bigger tariffs on China will be following shortly after,” said Rodrigo Catril, strategist at National Australia Bank Ltd. in Sydney. “The dollar has room to trade higher.”
The dollar had fallen immediately following Trump’s inauguration on bets he would hold off on immediate tariffs. Its sudden subsequent reversal underscores just how jittery traders are on any news around duties and their impact on the global economy. Trump’s earlier pledges, which have included ratcheting up levies to as high as 60% on shipments from China, have sent shock waves through the $7.5-trillion-a-day foreign-exchange market.
The risk of Trump’s high-tariff policy with solid economic expansion is expected to keep the Fed cautious of rate cuts and support the dollar’s resilience. Still, the future scope of Trump’s protectionist trade measures — and the timeline for their actual implementation — remains an open question closely watched by traders.
Overnight-indexed swaps signaled a 69% chance of the Fed cutting the benchmark rate more than once this year, up from 46% on Friday. SMBC Nikko Securities Inc. and Nomura Securities Co. both said US yields may decline further.
Treasuries rallied as global cash trading resumed after Monday’s US holiday, mainly reflecting the president’s decision to avoid imposing China-specific tariffs on his first day in office. The benchmark US yield slid close to 10 basis points to 4.53%.
“Markets were fixated on big tariffs bazookas from day one,” said Shoki Omori, chief global desk strategist at Mizuho Securities. “The absence of that, especially on China, is driving a relief rally for Treasuries.”
The offshore yuan fell as much as 0.4%, dragging the risk sensitive Australian and New Zealand dollars with it. The People’s Bank of China set the yuan reference rate at the strongest level since Nov. 8, in a sign it’s ramping up support for the currency.
The dollar has rebounded as President Trump sets his sights on imposing more tariffs on Canada and Mexico. This move comes as tensions continue to rise between the United States and its North American neighbors over trade agreements and border security.
The prospect of additional tariffs has caused the dollar to strengthen against major currencies, as investors seek safe-haven assets in light of the uncertainty surrounding trade relations. The increased tariffs could further disrupt the already fragile trade relationships between the three countries, potentially leading to higher prices for consumers and businesses.
As the situation unfolds, it will be important for investors to closely monitor developments and consider the potential impact on the global economy. The future of trade relations between the United States, Canada, and Mexico remains uncertain, and the dollar’s performance will likely be closely tied to the outcome of these negotiations.
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