The US dollar held firm on Tuesday as President Donald Trump's tariff threats were seen as more of a negotiating tactic than an end goal, a day after he suspended planned actions against Mexico and Canada.
However, the Trump administration imposed an additional 10% tariff on imports from China starting at 12:01 a.m. ET (0501 GMT) on Tuesday. Currency analysts expect heightened sensitivity to tariff developments and volatility to continue.
The US dollar index, which measures the greenback against six major currencies, held steady at 108.5. Meanwhile, the Canadian dollar and Mexican peso weakened after recovering on Monday.
The euro also fell slightly on Washington's threat that the European Union could be the next target of tariffs. The move is expected to boost US inflation, supporting the dollar as US interest rates remain high for longer.
Beijing on Tuesday imposed tariffs on some US imports in immediate response to new tariffs on Chinese goods, escalating tensions between the world's two largest economies.
“Overall, China’s move is still modest,” said Lee Hardman, senior currency analyst at MUFG.
He also cautioned that the 10% tariff hike may be just China’s first step, as Trump has previously threatened to raise tariffs as high as 60%.
The Chinese yuan fell about 0.15% to 7.2914 per dollar in offshore trading. There was no official trading in the yuan as of Wednesday as mainland markets were closed for the Chinese New Year holiday.
The Australian dollar, often used as an unofficial marker for the yuan because of Australia’s economic ties with China, fell 0.35% to $0.6206, but was still higher than Monday’s low of $0.6085.
The euro fell 0.15% to $1.033, with market participants eyeing the possibility of it reaching parity with the U.S. dollar.
He also expects that if the European Central Bank (ECB) terminal interest rate were to fall to 1.50%, while the Federal Reserve's (Fed) policy path remains unchanged, the euro could fall to 0.98-0.99 dollars.
Several analysts have recently said that the US tariffs would have a deflationary effect on the euro zone.
The Canadian dollar fell 0.15% to C$1.4428 against the US dollar after recovering sharply from a low of C$1.4792 on Monday, the lowest level since 2003.
The pound fell against the euro after recording its biggest daily gain in three months, with investors expecting the US tariffs to have a greater impact on the European economy than the UK.
The US dollar rose 0.38% to 155.31 yen, with the Japanese currency seen as a safe-haven asset, while the greenback has become less attractive after recent gains.
