The US dollar fell against most major currencies as traders began to reduce expectations of a full-scale trade war.
The Bloomberg Dollar Spot Index fell as much as 0.4% to its lowest level in more than a week, extending its decline from a more than two-year high hit on Monday.
Traders are now readjusting their expectations for the world’s reserve currency after US President Donald Trump delayed the implementation of tariffs on Mexico and Canada. Attention is now returning to market fundamentals, with weaker US jobs data on Tuesday raising bets on a rate cut.
“The broad-based weakness in the US dollar continues, as tariff hedges are being cancelled for short-term moves,” said Jordan Rochester, chief FICC strategist at Mizuho. “A month-long delay means it’s not worth the price tag right now.”
After the dollar’s surge since October, investors are now waiting for clues on whether the US economy will continue to outperform its peers. On Wednesday, the market will look at the labor market report and the amount of debt planned by the government for the next quarter.
Investors have remained bullish on the dollar since late last year and have maintained their net long position in the currency, according to Commodity Futures Trading Commission (CFTC) data for the week ended January 28 compiled by Bloomberg.
The U.S. dollar fell the most against the yen on Wednesday after better-than-expected Japanese wage growth data strengthened the case for a rate hike by the Bank of Japan (BOJ). This led to the two-year U.S.-Japan interest rate differential hitting a four-month low.
“The main feature of the forex market today was the yen’s surge after the strong payrolls data, coupled with the cancellation of tariff-related trades. My model shows that USD/CAD is now factoring in tariffs at 5.6%, the lowest reading since early December.” – Cameron Crise, Macro Strategist, New York
The yen strengthened 1% to 152.76 per U.S. dollar. Other export-sensitive currencies such as the New Zealand dollar and the Taiwan dollar also strengthened as the risk of a global trade war eased.
The US dollar continued to weaken on the perception that Trump “will use tariffs as a negotiating tactic to get certain measures, rather than trigger a trade war,” said Charu Chanana, chief investment strategist at Saxo Markets.
