Dollar Strengthens on Trump’s Tariff Threats; Euro Nears Two-Year Low
The dollar firmed on Monday after U.S. President Donald Trump announced plans to impose new 25% tariffs on all steel and aluminum imports, pressuring the euro and commodity-linked currencies like the Australian and New Zealand dollars.
Trump also stated he would unveil reciprocal tariffs on Tuesday or Wednesday, applying them universally and matching each country’s tariff rates. This move fuels concerns over a global trade war, as China’s retaliatory duties on U.S. goods are set to take effect Monday.
Last week, Trump initiated trade tensions by imposing tariffs on Mexico and Canada before temporarily pausing them, while maintaining duties on Chinese goods. Beijing’s measured tit-for-tat response has left room for potential negotiations.
The euro fell 0.1% to $1.0317 in early trading, hovering near its more than two-year low of $1.0125 as investors braced for Trump’s repeatedly threatened tariffs against Europe.
The Australian dollar dipped 0.21% to $0.6264, near a five-year low, while the New Zealand dollar eased 0.12% to $0.5649. The Canadian dollar weakened over 0.2%, with Canada being the largest supplier of primary aluminum to the U.S.
Charu Chanana, chief investment strategist at Saxo, noted that traditional market reactions may no longer apply, as China has significantly reduced steel exports to the U.S. since the 2018 tariffs.
“The immediate concern, however, might not be inflation, as there could be counter effects such as demand slowdown. The bigger concern is the uncertainty and the shift towards a more protectionist world,” Chanana said.
Beyond Trump’s trade policies, investors are watching U.S. inflation data due Wednesday and Federal Reserve Chair Jerome Powell’s testimony before the House of Representatives on Tuesday and Wednesday, where tariffs are likely to be a key topic.
Analysts warn that tariffs could drive inflation higher, increasing pressure on the Fed to maintain elevated interest rates. Markets are currently pricing in 36 basis points of rate cuts this year, down from 42 basis points following a strong payrolls report on Friday.
Macquarie strategists noted that the January employment report signals strength in the labor market and overall economic growth but has led the firm to revise its Fed policy outlook.
“Our updated view is for no change in the Fed funds rate during 2025, with it likely to remain in the 4.25% to 4.5% range. Previously, we had expected one more 25 basis point cut in either March or May.”
The dollar index, which tracks the U.S. currency against six peers, remained steady at 108.23 in early trading. Sterling was little changed at $1.23915.
The Japanese yen weakened 0.4% to around 152 per dollar but stayed close to the one-month high it reached Friday amid growing expectations that the Bank of Japan may raise interest rates this year.