The U.S. dollar strengthened against six major currencies on Tuesday on fresh U.S. tariff threats, giving traders some breathing room after Monday’s big “risk-off” move on the back of China’s low-cost artificial intelligence models.
Any relief that President Donald Trump has not immediately raised tariffs after taking office last week was a relief to the market.
Trump said on Monday that he planned to impose tariffs on imported computer chips, pharmaceuticals and steel in a bid to push production to the United States.
The remarks came a day after the U.S. and Colombia avoided a trade war when the White House announced that the South American country had agreed to accept military planes carrying deported migrants.
The Financial Times reported that Trump’s pick for Treasury Secretary, Scott Bessent, is pushing for universal tariffs on U.S. imports, starting at 2.5% and rising monthly.
“This statement contradicts the optimistic market assumption that the tariffs will be targeted and not universal,” said Francesco Pesole, foreign exchange strategist at ING.
Expectations that the tariffs will boost inflation have led to a reduction in bets on a US interest rate cut ahead of the presidential inauguration, which in turn strengthened the US dollar.
The euro fell 0.7% to $1.04155. The pound was trading at $1.2425, down 0.6% on the day, while the Canadian dollar fell 0.27% to 1.4412 against the US dollar.
Trump also signaled the possibility of a 25% tariff on imports from Canada and Mexico on February 1, in addition to threatening tariffs on the EU and China.
The US dollar index, which measures the greenback against six major currencies, recovered 0.2% to 108 after hitting its lowest level since mid-December at 106.96 the previous day.
The focus on tariffs caused traders to reverse most of Monday’s big “risk-off” move as a free, open-source AI model from Chinese company DeepSeek raised questions about the high valuations and dominance of U.S. AI companies like Nvidia.
“While the dollar is not a safe haven in the stock market, tariffs are a bigger, longer-term concern for the foreign exchange market,” Pesole said.
The yen weakened again after safe-haven demand lifted the yen to its highest since mid-December at 153.715 per dollar on Monday.
Against the yen, the dollar rose 0.6% to 155.38 yen.
The dollar also gained 0.47% against the Swiss franc to 0.9061, recovering from a five-week low on Monday.
The 10-year Treasury yield rose again after falling to a one-month low in the previous session.
The Federal Reserve’s two-day meeting begins on Tuesday, where interest rates are expected to remain unchanged. Investors will be looking for clues as to whether a rate cut could be imminent if inflation moves closer to the Fed's 2% annual target.
Money markets are currently expecting a 48 basis point rate cut this year but do not expect a cut until June.
Fed officials have signaled the potential impact of Trump's trade, immigration and other policies, with staff at the December meeting predicting little further progress on inflation this year.
The European Central Bank (ECB) also meets this week and is expected to cut interest rates.
