(Bloomberg) — The dollar rebounded from its biggest decline in 14 months amid bets that U.S. President Donald Trump’s tariff plans would boost inflation and prevent further cuts in U.S. interest rates. from the Federal Reserve.
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Bloomberg’s dollar gauge rose 0.7% in Asia on Tuesday after trade fell in New York as Trump said he could impose 25% tariffs on Mexico and Canada in February . Both countries’ currencies fell more than 1% against the greenback before slowing the trend.
“If 25% tariffs are imposed on Mexico and Canada, higher tariffs on China will surely follow soon after,” said Rodrigo Catril, a strategist at National Australia Bank Ltd. in Sydney. “The dollar has the opportunity to trade higher.”
The dollar had fallen immediately after Trump’s inauguration on bets that he would delay the immediate imposition of tariffs. His sudden reversal underscores how nervous traders are about any news about tariffs and their impact on the global economy. Trump’s previous commitments, which included raising taxes of up to 60% on shipments from China, sent shockwaves through the $7.5 trillion-a-day foreign exchange market.
The risk of high Trump tariffs accompanied by strong economic expansion should keep the Fed cautious about rate cuts and support dollar resilience. Still, the future scope of Trump’s protectionist trade measures – and the timing of their actual implementation – remains an open question and one closely watched by traders.
Overnight index swaps show there is a 69% chance the Fed will cut its benchmark rate more than once this year, up from 46% on Friday. SMBC Nikko Securities Inc. and Nomura Securities Co. both said U.S. yields could fall further.
Treasuries rallied as global spot trading resumed after Monday’s U.S. holiday, mainly reflecting the president’s decision to avoid imposing specific tariffs on China on his first day in office. The U.S. benchmark yield slipped nearly 10 basis points to 4.53%.
“Markets were obsessed with big pricing bazookas from day one,” said Shoki Omori, chief global desk strategist at Mizuho Securities. “The absence of that, particularly as it relates to China, is leading to a relief rally for Treasuries.”
The offshore yuan fell 0.4%, dragging the risk-sensitive Australian and New Zealand dollars with it. The People’s Bank of China set the yuan’s benchmark rate at its highest level since November 8, a sign that it is strengthening its support for the currency.
