The US dollar (DX=F, DX-Y.NYB) further retreated from near two-year highs on Friday, falling to a one-month low after President Trump said he would “relatively not” impose tariffs on China.
“Now we have one very big power over China, and that is tariffs, they usually don’t want them,” Trump said in an interview with Fox News on Thursday. “And I’d relatively not should use it. Nevertheless it’s an incredible power over China.”
The US Dollar Index, which measures the dollar’s value relative to a basket of six foreign currency echange — the euro, Japanese yen, British pound, Canadian dollar, Swedish krona, and Swiss franc — fell over 0.5% on Friday to cap off its worst week in over a yr. The greenback saw its largest one-day drop since November 2023 earlier this week because the president shunned enacting broad-based tariffs on his first day in office.
Still, the index has gained around 7% since its September lows and is up about 4% since Election Day.
The dollar’s price motion has largely been driven by two principal catalysts: Trump’s election and the following Republican sweep, together with the recalibration of future Fed easing within the face of strong economic data.
However the unknown of Trump’s tariff policy has been the largest driver in recent weeks and appears set to stay that way within the months ahead.
President Donald Trump signs an executive order within the Oval Office of the White House, Thursday, Jan. 23, 2025, in Washington. (AP Photo/Ben Curtis) ·ASSOCIATED PRESS
Despite recent moves to the downside, analysts at Bank of America argue it stays sensible for the market to proceed to cost in tariff risk with regards to the dollar.
“Even when tariffs are delayed, they’re more likely to be a key policy pillar for the brand new administration,” wrote Adarsh Sinha, lead FX and rates strategist at BofA. “More importantly, uncertainty across the timing of tariff increases stays.”
Capital Economics, meanwhile, expects the dollar index to climb further this yr, noting that, when adjusted for inflation, the greenback is at its strongest levels because the signing of the pro-growth international agreement, the Plaza Accord, in 1985.
“We predict that US tariff policy and shifts in rates of interest could push the dollar up further in the approaching quarters,” Simon MacAdam, deputy chief global economist at Capital Economics, wrote on Friday.
Kyle Chapman, FX markets analyst at Ballinger Group, added the dollar “is incredibly sensitive to the tariff outlook without delay.”
Trump declined to enact a tariff order during his first day in office, as an alternative issuing a memorandum on Monday directing federal agencies to guage US trade policy.
But as Yahoo Finance’s Ben Werschkul has reported, Trump’s first week in office saw a spread of recent tariff threats against nations, starting from Russia to members of the European Union. Up first, Trump says, are 25% tariffs on Canada and Mexico and 10% duties on China that might be implemented as soon as Feb. 1.
Chapman said the dearth of day-one blanket tariffs “is the largest clue yet that we might be peak dollar, although I’d not get my hopes up just yet.”
Corporations have already discussed this phenomenon on earnings calls this quarter, with Netflix (NFLX) telling investors on Tuesday that about 60% of its revenue comes from non-US dollar currencies. To that time, the corporate’s guidance for the present quarter got here in below estimates, with full-year 2025 revenue expected to decelerate in comparison with 2024 because the rising dollar weighs on forecasts.
And people warnings are only more likely to tick up this earnings season.
Per FactSet data, S&P 500 corporations with international exposure drove the majority of earnings growth through the third quarter, a troubling indication that any weakness on the forex front could bleed into overall stock market performance.
Capital Economics’ MacAdam noted, nonetheless, that a robust dollar today “is an issue for tomorrow.”
Within the short run, the dollar’s rise “is frequently not as harmful as often suggested,” MacAdam wrote. He argued large firms typically hedge against foreign exchange movements to stop drastic hits to growth, while the inverse relationship between the dollar and commodity prices, like energy, could function a positive catalyst to headline inflation and lower prices for importers.
But over time, an elevated dollar will weigh on global trade, with tightened global financial conditions, increased inflation overseas, and pressured exports all seen as potential consequences.
“Even when the dollar stops strengthening, a high level of the dollar can still create problems for the world economy,” he warned.