The U.S. dollar declined on Tuesday, weighed by uncertainty over President-elect Donald Trump’s monetary policy stance. However, it remained near two-year highs ahead of the release of key inflation data for the week.
In early trading, the dollar index, which tracks the greenback against a basket of six other currencies, was trading about 0.4% lower at 109.325, after rising to a 26-month high on Monday.
Dollar Retreats from Highs
The dollar pulled back from its highs following a Bloomberg report suggesting that the incoming Trump administration might adopt a gradual approach to implementing tariffs.
Earlier in the year, the dollar had rallied after Trump promised to impose steep tariffs, including a 60% tariff on China, starting from “day one” of his second presidency. Despite this dip, the greenback maintained bullish momentum, bolstered by last Friday’s robust jobs report, which supported the Federal Reserve’s cautious stance on monetary easing in 2025.
At its December meeting, the Fed revised its expectations for rate cuts this year, reducing the projected number from four to two, citing concerns about inflation remaining above target.
This week, market attention centers on the U.S. consumer inflation report, due Wednesday, preceded by the producer price index (PPI) report expected later today.
“This week’s U.S. inflation data could reinforce the dollar’s strong momentum and cast further doubt on whether the Fed needs to cut,” analysts at ING said in a note.
“Tomorrow’s CPI should have the biggest impact on the market, but today’s PPI is still very relevant, especially as many of the PPI components feed into the Fed’s preferred inflation measure – underlying PCE.”
Sterling Under Pressure
In Europe, GBP/USD edged 0.1% higher to 1.2214 after falling as low as 1.21 on Monday, marking its weakest level since November 2023.
The pound has struggled this year due to rising bond yields and elevated borrowing costs, raising concerns that the new Labour government might be forced to tighten fiscal policies, either through spending cuts or tax hikes, to adhere to its fiscal rules. Such measures could dampen future economic growth.
The UK faces a heavy data week, beginning with consumer price index (CPI) data on Wednesday.
“Gilts have remained under pressure following the underperformance of global fixed income. There is now a tangible risk that 10-year yields could move above 4.90% ahead of tomorrow morning’s UK CPI release. Should it be higher than expected, selling pressure may intensify to 5.0% and potentially beyond,” ING said.
Meanwhile, EUR/USD was up 0.1% at 1.0255, slightly above the two-year low of 1.0177 recorded on Monday.
The euro has had a rough start to the year, losing over 7% in 2024, as concerns over weak economic growth in the region persist, coupled with ongoing tariff threats. Later today, confidence data from Germany and the broader eurozone are set to be released.
The European Central Bank (ECB) is expected to cut interest rates by approximately 100 basis points in 2025, with most reductions anticipated in the first half of the year.
Bank of Japan Meeting Approaches
In Asia, USD/JPY rose 0.2% to 157.77 after BOJ Deputy Governor Ryozo Himino stated that the central bank would discuss a potential rate hike at its meeting next week.
Speculation of further rate hikes by the Bank of Japan has increased recently, supported by strong wage growth and household spending data. Inflation in Japan has consistently remained above the 2% annual target set by the central bank.
Meanwhile, USD/CNY traded flat at 7.3311, hovering near its highest level since September 2023, amid expectations of further stimulus measures from Beijing. The People’s Bank of China (PBOC) is also set to decide its benchmark lending rate this week.
Conclusion
The dollar’s retreat on Tuesday reflects market recalibration ahead of significant inflation data, with traders cautiously positioning themselves amid the ongoing uncertainty around the Trump administration’s tariff policies. Meanwhile, sterling remains vulnerable due to domestic economic challenges, while speculation over the Bank of Japan’s next move adds intrigue to the yen’s trajectory. The focus remains on upcoming PPI, CPI, and central bank policy decisions, which are set to influence global market movements in the days ahead.
