The US dollar drifted slightly lower on Wednesday as financial markets grappled with uncertainty surrounding President Donald Trump’s tariff plans. Despite Trump’s statements about imposing a 10 per cent tariff on Chinese imports and 25 per cent levies on goods from Mexico and Canada starting February 1, a lack of concrete details has kept traders on edge.
On Tuesday evening, Trump reiterated his administration’s consideration of tariffs but stopped short of enacting them immediately. The dollar index, which measures the greenback against a basket of six major currencies, dipped 0.14 per cent to 108 as of 0054 GMT. The euro slipped 0.07 per cent to $1.0420, while the yen edged up slightly to 155.40 per dollar.
Investor Sentiment and Fed Expectations
Despite the tariff threats, the dollar began the week with a 1.2 per cent slide as markets remained wary of the administration’s next moves. It stabilised on Tuesday, ending flat after an attempted rebound lost momentum. U.S. officials have indicated that any new tariffs would be rolled out gradually, calming some fears of immediate disruption.
“While Trump threatened tariffs up to 25 per cent on Mexico and Canada, he refrained from enacting them despite signing several executive orders,” said Tony Sycamore, an analyst at IG. “His decision not to target China aggressively suggests a more cautious approach, which could help ease inflation concerns and prevent the Federal Reserve from adopting a more hawkish stance.”
Traders are currently pricing in a quarter-point Fed interest rate cut by July, with another potential cut by year-end viewed as a coin toss.
China’s yuan remained steady at 7.2735 per dollar in offshore trading, following its strongest level since December 11 on Tuesday, when it touched 7.2530. The Canadian dollar eased by 0.1 per cent to C$1.4335 per US dollar, after experiencing volatility earlier in the week. The currency dropped to its lowest level since March 2020 amid concerns over cooling inflation. Similarly, the Mexican peso slipped 0.1 per cent to 20.6350 per dollar.
Analysts Weigh In on Tariff Impact
Market experts believe that the proposed 10 per cent tariffs on Chinese imports are significantly lower than the 60 per cent rate Trump floated during his campaign. “This suggests that Trump is not pursuing maximalist trade protectionism in his early actions but is instead positioning for trade negotiations,” said Alvin Tan, head of Asia FX strategy at RBC Capital Markets. “If this trend continues, the dollar could see further declines.”
The combination of Trump’s cautious tariff approach and expectations of Federal Reserve rate cuts could put additional downward pressure on the U.S. dollar. Analysts suggest that the market will closely watch further statements from the administration, as well as upcoming economic data, to gauge the potential impact on currency movements.
As investors seek clarity on Trump’s trade policies, the dollar’s performance remains uncertain. Traders are cautiously positioning themselves amid speculation about the timeline and scope of potential tariffs. Meanwhile, global currencies, including the euro, yen, and yuan, continue to react to the evolving trade landscape.