(Updated 13:00, 24/01/25) The US dollar (USD) has suffered notable losses this week, with Donald Trump’s early days in office proving negative for the American currency so far. Trump has taken a softer approach to tariffs than many had feared, with this relief weighing on the safe-haven ‘greenback’.
However, movement has been choppy, with USD fluctuating in a wide range. The weeks ahead look set to bring more volatility to the currency market, with the ‘greenback’ potentially able to recover as Trump presses ahead with sweeping policy changes and the Federal Reserve delivers its latest interest rate decision.
At the time of writing, the US dollar index (DXY) is at its lowest level since mid-December. Meanwhile, the USD/GBP and USD/EUR exchange rates are both down 2%, at £0.8055 and €0.9543, respectively.
US dollar rocked by Trump’s return to office
The US dollar fell sharply on Monday. Investors looked to bank their profits after USD struck a 27-month high ahead of Donald Trump’s inauguration.
Markets were also relieved that Trump did not kick off his presidency by enacting sweeping tariffs. Officials said that new taxes would be implemented in a measured way, further alleviating fears of a sudden shock to global trade.
Trump then told reporters he was considering 25% tariffs on Canada and Mexico as early as February – sending both the Canadian dollar (CAD) and the Mexican peso (MXN) plummeting – but that the US was not yet ready to implement universal tariffs. A blitz of executive orders followed, driving further volatility in the US dollar and wider currency market.
However, the overall tone so far is relief that Trump has not immediately pursued an aggressive new tariff regime. In the latter part of the week, Trump said in a Fox News interview that he ‘would rather not’ impose tariffs on China and that he believes the two superpowers can reach a trade agreement.
Markets have had a cautiously optimistic response so far, with stocks in Europe, the US and Japan posting decent weekly gains. Chinese markets have also had a stronger end to the week, following the comments on Fox News. This in turn is depriving the US dollar of safe-haven flows, thereby driving USD exchange rates lower.
US dollar to recover as Trump pushes ahead with plans?
Looking ahead, we expect to see more volatility in the coming days and weeks. While Trump has already enacted a flurry of executive orders, there is still huge uncertainty over some big policy areas – particularly tariffs. Any hints or threats from Trump could spark big swings in the currency market, while concrete actions are likely to have a more lasting effect.
If Donald Trump does decide to go ahead with 25% tariffs on Canada and Mexico, along with a proposed 10% tariff on Chinese-made goods, we could see USD soar while CAD and MXN slump.
The Australian dollar (AUD) and the New Zealand dollar (NZD) could also see sharp losses, as these currencies are both risk sensitive and tied to the health of the Chinese economy.
A more measured approach, however, with tariffs being delayed or implemented more gradually could see USD continue its recent retreat. If the conciliatory tone between Washington and Beijing continues, the US dollar could decline while riskier currencies rally.
Heightened volatility ahead as interest rate decisions loom
Further fuelling volatility, next week we have interest rate decisions from the Bank of Canada (BoC), Federal Reserve, and European Central Bank (ECB), along with the fourth-quarter GDP figures from the Eurozone and the US.
Expected rate cuts from the BoC and ECB could see CAD and EUR exchange rates decline, while a hawkish hold from the Fed may lend strength to the US dollar.
Robust US GDP in the last quarter of 2024 could add to USD’s gains, while anaemic growth in the Eurozone may drive the euro lower.
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