Forex
Dollar on back foot; euro awaits key inflation release
Investing.com – The US dollar slipped lower Tuesday, heading towards a one-week low following a report that President-elect Donald Trump’s tariffs could be less aggressive, while the euro gains ahead of key inflation data.
At 04:25 ET (09:25 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.3% lower to 107.775, after falling overnight to its weakest since Dec. 30.
Dollar remains on backfoot
The dollar has been on the backfoot since the Washington Post released a report on Monday stating that the new Trump administration was exploring plans to limit tariffs to sectors seen as critical to US national or economic security.
President-elect Donald Trump has denied the report in a post on his Truth Social platform, but the dollar has still struggled to make headway.
“The dollar’s failure to recover all its intraday losses on Monday likely indicates two factors: first, the market had been heavily favoring the dollar following a nearly continuous three-month rally; second, a view that there is no smoke without fire and that the contents of that Washington Post report sounded sensible,” said analysts at ING, in a note.
There is a lot of US economic data to digest Tuesday, including for December and the November , ahead of Friday’s release of the closely watched for further clarity on the health of the world’s largest economy.
“It is unlikely investors will want to consider actively selling the dollar ahead of Trump’s inauguration on 20 January on speculation over softer tariffs – but we could see a little more rebalancing of FX positioning and a little more dollar consolidation in the interim,” ING added.
Euro climbs ahead of inflation data
In Europe, rose 0.4% to 1.0431, climbing once more after jumping to a one-week high on Monday.
Attention turns Tuesday to the release of the latest inflation data out of the eurozone – the last data on regional prices before the European Central Bank’s next meeting on Jan. 30.
The for December is expected to have risen 2.4% in December on an annual basis, speeding up from 2.2% in November.
However, data released from Spain and Germany showed faster-than-expected pickups in inflation, while France surprised to the downside.
Investors are currently looking for the ECB to ease interest rates by around 100 basis points in the first half of 2025, and any signs that inflation is easing further would give the ECB scope to loosen policy more, weighing on the single currency.
traded 0.4% higher to 1.2569, following sharp gains overnight, despite data showing British house prices dropped unexpectedly last month for the first time since March.
Mortgage lender Halifax said fell 0.2% in December after a 1.2% rise in November, and were 3.3% higher on the year – lower than the 4.2% expected.
The held interest rates unchanged last month after consumer prices rose above target, and is expected to proceed cautiously with further rate cuts this year.
Yuan remains weak
In Asia, rose 0.1% to 7.3325, with the Chinese currency continuing to underperform, hitting its weakest level in 17 years on Monday.
While the currency did recover some ground, it remained fragile, with new US. restrictions against Chinese companies adding more pressure on the currency.
slipped slightly to 157.56, after earlier hitting its highest level in nearly six months.
Investing.com – The US dollar has gained strongly since the US presidential election in November, but these gains are unlikely to limit the hit that US customers are likely to face from tariffs, according to UBS.
At 08:25 ET (13:25 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.2% lower to 108.950, but was around 1.5% higher over the last month, and remained not far from the more than two-year high seen last week.
The theory is that a stronger dollar lowers US import prices, said analysts at UBS, in a note dated Jan. 17. Those lower prices would partially offset the tax payments US consumers must make to the US Treasury when buying imports.
If the US paid for the Chinese imports, then a stronger dollar would automatically reduce the amount of dollars paid (fewer dollars are exchanged to pay the renminbi price). However, the US pays for practically all its imports in dollars, so this does not happen.
If the dollar strengthens, the dollar price is unchanged, unless the exporter consciously chooses to lower the dollar price of the goods sold, UBS added.
An exporter to the US might deliberately lower dollar prices, as (in dollar terms) local currency costs are lower. But local currency costs are only a fraction of a manufacturer’s costs.
“A Chinese electronics manufacturer, importing chips (bought in dollars) and exporting computers to the US (in dollars), will probably keep their dollar prices stable—ignoring currency moves,” UBS added.
The US dollar strengthened against China’s renminbi in 2016 and 2018/19, and US import price inflation for products from China showed no noticeable break with earlier trends.
The preference seems to have been to reroute supply chains as a way of avoiding trade taxes.
Investing.com – The US dollar slumped Monday following a report that indicated that President-elect Donald Trump was set to delay imposing trade tariffs immediately upon his inauguration, an expectation which had boosted the US currency following his November election victory.
At 09:20 ET (14:20 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 1.1% lower to 108.020, having climbed to a more than two-year high last week.
The Wall Street Journal reported Monday that Trump is planning to issue a broad memorandum on his inauguration that directs federal agencies to study trade policies and evaluate US trade relationships with China and America’s continental neighbors—but stops short of imposing new tariffs on his first day in office.
The memo, which the WSJ has seen, suggests that debates are still ongoing within the incoming administration over how to deliver on Trump’s campaign trail promises for hefty tariffs on imports from trade rivals such as China.
The dollar has gained around 4% since the November presidential election as traders anticipated Trump’s policies will be inflationary, necessitating higher interest rates for a longer period.
“Financial markets are on tenterhooks to see what executive orders newly elected US President Donald Trump will enact on his first day,” said analysts at ING, in a note.
“FX markets are most interested in what he has to say about tariffs and what kind of pain the Oval Office plans to inflict on major trade partners.”
Bank of America (BofA) noted a significant increase in repo rates during the week of January 13 due to heightened liquidity demand triggered by tax payments and limited funding provided by the People’s Bank of China (PBoC).
The liquidity squeeze was most noticeable on January 16, the day following the tax payment deadline, with DR007 and R007 reaching 2.34% and 4.19%, respectively.
The PBoC maintained its stance on defending the exchange rate stability, resulting in the tightness of (RMB) liquidity being felt in the offshore market as well.
On January 9, the central bank announced it would issue RMB60 billion of 6-month bills in Hong Kong, a significant increase compared to previous issuances. The coupon rate of 3.4% was notably higher than the December issuance, reflecting the tightness of CNH liquidity and subdued demand from investors.
The December FX settlement balance by banks’ clients fell further to a deficit of US$10.5 billion, the first deficit reading since July 2024. A key change from the previous month was a sharp increase in USD demand for service trade. Reports also suggest that domestic importers have been actively purchasing USD via FX forward to hedge against tariffs risk in recent weeks, which has been exerting upward pressure on forward points.
On January 13, the PBoC increased the cross-border macroprudential parameter to 1.75 from 1.50. This move allows domestic corporations and Financial Institutions (FIs) to conduct more cross-border borrowing.
Given the widened interest rate gap between China and overseas, BofA believes this is more of a symbolic move by the PBoC to anchor market’s expectation on FX.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.
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