The US dollar fell on Wednesday, trading defensively since the Trump administration’s agreement with its neighbors Canada and Mexico to delay tariffs, while the euro gained despite disappointing regional services activity.
The dollar index, which analyzes the evolution of this currency in comparison to a basket of six other major currencies, was trading down about 0.4% to 107.405, retreating from the three-week high recorded earlier in the week.
Dollar is on the defensive
Volatility in the currency markets has eased somewhat after a somewhat turbulent start to the week following Trump’s imposition of high tariffs on the United States’ main trading partners, and tariffs on its neighbors Canada and Mexico have since been delayed following negotiations.
Trump, however, did not back down on the imposition of tariffs on China, and Beijing has responded quickly by imposing tariffs on imports such as agricultural equipment, US energy shipments and automobiles.
“The focus is now on China, and a relatively measured response from Beijing to Trump’s tariffs keeps markets optimistic that some agreement can be reached before China’s retaliatory tariffs take effect on January 10,” ING analysts said in a note.
Traders are also keeping an eye on President Trump’s surprise plan for the United States to take over the war-torn Gaza Strip and develop it economically, given the complicated nature of the issue in the Middle East.
“Markets are treating with skepticism Trump’s announced intention to take over the Gaza Strip and evacuate Palestinians to neighboring countries,” ING said.
“If we see signs that the US is planning to deploy troops in the Middle East, the implications for the market could be risk aversion, positive for oil and positive for the dollar, as Arab nations should strongly oppose the move.”
Euro rises despite disappointing PMI data
In Europe, the EUR/USD traded 0.3% higher at 1.0411, although overall data disappointed in relation to January services activity in the euro zone.
The HCON services PMI for the eurozone fell to 51.3 during the first month of 2025, down from 51.6 in December, while the composite index remained marginally in growth territory.
“We stand by our prediction that EUR/USD will begin to lose support once it crosses 1.040, as the euro remains unattractive from a macro-fundamental perspective and Trump has indicated that the EU should be next on the tariff list,” ING added.
GBP/USD traded 0.4% higher at 1.2523 ahead of the Bank of England’s policy meeting scheduled for Thursday.
The UK central bank is likely to cut interest rates next week from 4.75% to 4.5% when it also updates its estimates for economic growth and inflation.
Since the Bank of England published its latest estimates in November, the economy seems to have stagnated and the measures of inflation most analyzed by those in charge of setting interest rates fell the previous month.
Strong fluctuation of the onshore yuan
The USD/CNY rate rose 1.2% in Asia, to 7.2710, and the onshore yuan experienced sharp fluctuations on Wednesday, as the country returned from vacation.
The main issue continues to be Trump’s trade tariffs, which began to be applied on Tuesday. China responded by imposing tariffs on some US commodity imports, applying export controls on rare earths and also launching an antitrust investigation into Google (NASDAQ:GOOGL).
USD/JPY traded 0.8% lower to 153.12, its lowest level since mid-December.
The yen was mainly boosted by data on average cash earnings and benefits, which were stronger than expected and reflected sustained growth in December. The reading was also boosted by year-end bonuses.
The reading was related to expectations that the Bank of Japan will have enough impetus to continue raising interest rates, after having raised them by 25 basis points the previous week.
