New York – The US dollar pared a sharp decline against most major currencies on Jan 6 after US President-elect Donald Trump denied a report that his tariff plans will not be as broad as originally feared, with the currency volatility buffeting traders who have piled into long positions on the greenback to open the year.
The Bloomberg Dollar Spot Index ended the session down 0.6 per cent after earlier falling more than 1 per cent, the biggest intraday drop since 2023, following a Washington Post report that Trump aides were exploring a tariff plan that covers only critical imports. The euro rallied as much as 1.3 per cent against the greenback, the common currency’s largest intraday gain in 14 months, while the pound also jumped as much as 1 per cent.
The initial loss in the dollar was “an outsized reaction to an unverified report, but it does show the direction of travel”, said Ms Kathleen Brooks, director of research at XTB. “We’ve had a large build-up of dollar longs and they are at risk of a turnaround.”
Traders pared their currency bets and erased gains in bonds after Trump wrote on Truth Social that the Washington Post report was “wrong” in stating that his tariff policies will be softened. The President-elect, in a separate post to Truth Social, said US Steel, whose merger with Nippon Steel was blocked by President Joe Biden last week, would be a “much more profitable and valuable company” under tariffs.
The dollar has benefited from expectations that Trump will levy the US’ major trading partners, hurting currencies including the renminbi and euro. But a tariff programme covering only key sectors such as the defence industrial supply chain would have a lesser impact on the global economy and US inflationary pressures than one covering a broader range of imports, meaning the dollar has room to weaken.
The Washington Post also reported that Trump was mulling over a so-called universal tariff programme, meaning it applies to every country.
Goldman Sachs foreign-exchange strategists including Mr Stuart Jenkins, Mr Michael Cahill and Ms Isabella Rosenberg wrote in a note on Jan 6: “All in all, the reports suggest that the incoming administration is attuned to inflation risks and considering a more targeted initial step than the campaign proposals.”
Trump’s threatened trade policies have dominated discussion among investors and economic policymakers since his election victory in November. A broad tariff programme could hurt global economic growth and stoke consumer prices, especially in the event of retaliation from other jurisdictions.
Investors will be watching US December non-farm payrolls on Jan 10 for further clues on the outlook for Federal Reserve interest rate cuts. Traders are currently pricing some 38 basis points of Fed cuts in 2025.
Ms Jane Foley, head of currency strategy at Rabobank in London, said: “While any watering down of tariffs would be seen as reducing inflation risks, there is still a lot of uncertainty over tariffs and what would be designated as ‘critical’ goods. The uncertainties connected with Trump’s policies suggest a lot more volatility is likely in store.” BLOOMBERG
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