The US dollar fell on Tuesday amid uncertainty over the Trump administration’s tariffs policy but remained near two-year highs ahead of the release of key inflation data. At 04:15 ET (09:15 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.4% lower at 109.325 after climbing to a 26-month high on Monday. The dollar slipped from its highs following a Bloomberg report suggesting that the Trump administration might take a gradual approach to tariffs.
The dollar had surged earlier this year after President-elect Trump vowed to impose steep tariffs on several countries, including a 60% duty on China. Despite this, the greenback remains elevated after a strong report on Friday reinforced support for the US central bank’s cautious stance toward further monetary policy easing this year. The Fed cut the number of rate cuts projected for 2025 to two at its December meeting, down from four in September, with policy members concerned about inflation remaining above target.
The focus this week is now on the US inflation report due on Wednesday. Analysts at ING noted, “This week’s US inflation data could potentially reinforce the dollar’s strong momentum and cast further doubts on whether the Fed needs to cut rates at all. Tomorrow’s CPI should have the biggest market impact, but today’s PPI is still highly relevant, especially as many of the PPI components feed into the Fed’s preferred measure of inflation – the core PCE.”
In Europe, sterling traded 0.1% higher at 1.2214 after falling to 1.21 on Monday, its lowest since November 2023.
The pound has struggled this year as surging gilt yields and higher borrowing costs have prompted fears that the new Labour government may be forced to rein in spending or raise taxes to meet its fiscal rules, potentially weighing on future growth. “Gilts have remained under pressure, following the global bond underperformance.
Dollar drops amid inflation anticipation
There is now a tangible risk that 10-year yields will be trading above 4.90% before tomorrow morning’s UK CPI print. Should that data come in hotter than expected, selling pressure can intensify into the 5.0% handle and potentially beyond,” said ING. The euro rose 0.1% to 1.0255, just above its more than two-year low of 1.0177 seen on Monday.
The single currency has struggled at the start of the year after dropping more than 6% in 2024 as investors fret about weak economic growth in the region and tariff threats. The yen climbed 0.2% to 157.77 after Bank of Japan Deputy Governor Ryozo Himino said that the central bank will debate whether to raise interest rates at a meeting next week. Speculation over more rate hikes by the BOJ has grown in recent weeks, following strong wage growth and household spending data.
Japanese inflation has consistently remained above the BOJ’s 2% annual target in recent months. The Chinese yuan traded largely unchanged at 7.3311, remaining close to its highest level since September 2023, amid increased focus on more stimulus measures from Beijing. The People’s Bank of China is also set to decide on its benchmark interest rate this week.
The movements in major currencies are being closely watched as impending inflation data and central bank decisions could bring significant impacts to the financial markets worldwide. The dollar’s retreat from recent highs, the pressure on sterling, and the evolving policies in Europe and Asia are key factors to follow in the coming days.