The US dollar (DX=F, DX-Y.NYB) retreated further from a nearly two-year high on Friday and fell to a one-month low after President Trump said he would “prefer” no tariffs on China impose.
“We have one very big power over China, and that is tariffs, and they don’t want them,” Trump said in an interview with Fox News on Thursday. “And I’d rather not have to use it. But it is a huge power over China.”
The US Dollar Index, which measures the value of the dollar against a basket of six foreign currencies – the euro, the Japanese yen, the British pound, the Canadian dollar, the Swedish krona and the Swiss franc – fell more than 0 on Friday. 5% to end the worst week in over a year. Earlier this week, the dollar suffered its biggest single-day drop since November 2023, when the president refrained from imposing broad rates on his first day in office.
Still, the index is up about 7% since bottoming in September and up about 4% since Election Day.
The dollar’s price action was largely driven by two major catalysts: Trump’s election and subsequent Republican victory, along with the Fed’s recalibration of future easing in light of strong economic data.
But the unknown of Trump’s tariff policy has been the biggest driver in recent weeks and looks set to remain so in the coming months.
Despite recent downward moves, Bank of America analysts argue that it remains prudent for the market to price in rate risks when it comes to the dollar.
“Even if rates are delayed, they are likely to become a key policy pillar for the new administration,” wrote Adarsh Sinha, chief FX and rates strategist at BofA. “More importantly, there is still uncertainty about the timing of the rate increases.”
Read more: What are tariffs and how do they affect you?
Capital Economics, meanwhile, expects the dollar index to rise further this year, noting that, adjusted for inflation, the dollar is at its strongest level since the signing of the pro-growth international agreement. the Plaza agreement, in 1985.
“We think US tariff policy and shifts in interest rates could push the dollar further higher in coming quarters,” Simon MacAdam, deputy chief economist at Capital Economics, wrote on Friday.
Kyle Chapman, FX market analyst at Ballinger Group, added that the dollar is “incredibly sensitive to the rate outlook right now.”
Trump instead declined to issue a tariff order during his first day in office issuing a note On Monday, he ordered federal agencies to review U.S. trade policy.