(Bloomberg) — The dollar rebounded after its sharpest decline in 14 months amid bets that U.S. President Donald Trump’s tariff plans would boost inflation and prevent further Federal Reserve rate cuts.
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Bloomberg’s dollar rose as much as 0.7% in Asia on Tuesday after a slump in trading in New York when Trump said he might impose 25% tariffs on Mexico and Canada in February. The two countries’ currencies fell more than 1% against the dollar before paring the move.
“If there are 25% tariffs on Mexico and Canada, higher tariffs on China will certainly follow soon after,” said Rodrigo Catril, strategist at National Australia Bank Ltd. in Sydney. “The dollar has room to trade higher.”
The dollar had fallen immediately after Trump’s inauguration on bets that he would refrain from immediate tariffs. The sudden subsequent reversal underlines how nervous traders are about news of tariffs and their impact on the global economy. Trump’s previous pledges, including raising tariffs by up to 60% on shipments from China, have sent shockwaves through the $7.5 trillion-a-day foreign exchange market.
The risk of Trump’s high rates policy with solid economic expansion is expected to keep the Fed cautious about rate cuts and support the dollar’s resilience. Still, the future scope of Trump’s protectionist trade measures — and the timetable for their actual implementation — remains an open question closely watched by traders.
Overnight indexed swaps indicated a 69% chance the Fed will cut the benchmark rate more than once this year, down from 46% on Friday. SMBC Nikko Securities Inc. and Nomura Securities Co. both said U.S. interest rates could fall further.
Treasuries rose as global cash trading resumed after Monday’s US holiday, largely reflecting the president’s decision not to impose China-specific tariffs on his first day in office. US interest rates fell by almost 10 basis points to 4.53%.
“The markets were fixated on high-rate bazookas from day one,” said Shoki Omori, chief strategist at Mizuho Securities. “The absence of that, especially in China, is fueling a relief rally for government bonds.”
The offshore yuan fell as much as 0.4%, dragging down the risk-sensitive Australian and New Zealand dollars. The People’s Bank of China has set the benchmark interest rate for the yuan to the highest level since November 8, in a sign of increasing support for the currency.