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 “slightly not” impose tariffs on China.
The US Dollar Index, which measures the dollar’s value relative to a basket of six foreign exchange — the euro, Japanese yen, British pound, Canadian dollar, Swedish krona, and Swiss franc — is tracking for its worst week in over a 12 months.
Recent pressure within the US dollar has largely been driven by two major catalysts: Trump’s election and the next 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.
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 12 months, 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 expect 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.
Trump declined to enact a tariff order during his first day in office, as a substitute issuing a memorandum on Monday directing federal agencies to judge US trade policy.
But as Yahoo Finance’s Ben Werschkul has reported, Trump’s first week in office saw a variety of latest 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 could possibly be implemented as soon as Feb. 1.
Kyle Chapman, FX markets analyst at Ballinger Group, wrote in an email on Monday that the shortage of day-one blanket tariffs “is the largest clue yet that we could possibly be peak dollar, although I might not get my hopes up just yet.”