The U.S. dollar fell slightly on Tuesday, giving up some of its recent gains after the Trump administration postponed some of the planned tariffs, even as a trade war with China was confirmed.
The dollar index, which analyzes the movement of the greenback against a basket of six other currencies, was trading down about 0.5% to 108.310 after reaching a three-week high during the last session.
Dollar Retreats on Tariff Postponement
Concerns about a prolonged global trade war eased somewhat overnight after last-minute agreements between Trump and the leaders of Canada and Mexico.
Canadian Prime Minister Justin Trudeau and Mexican President Claudia Sheinbaum pledged to reinforce border control efforts in response to Trump’s demands for decisive action against immigration and drug trafficking. In return, the U.S. postponed the implementation of the 25% tariffs for 30 days.
However, China did not receive the same relief. U.S. tariffs on Chinese products came into effect earlier in the session, prompting Beijing to retaliate with tariffs on U.S. energy shipments and agricultural equipment, set to begin on February 10.
“In just a few hours, markets shifted from assessing the consequences of Trump’s massive protectionist measure to aggressively buying up previously affected currencies,” ING analysts said in a note.
“If markets were hesitant to fully price in the impact of tariffs until the last minute, Trump’s sudden change of course could justify even greater caution regarding future protectionist threats.”
The Euro Could Continue to Face Pressure
In Europe, the EUR/USD pair traded without major changes at 1.0345, rebounding from its lowest level since November 2022 during the previous session.
While the euro benefited from the tariff postponement for Mexico and Canada, further gains may be difficult to achieve, as the European Union remains a potential target for U.S. trade measures.
“Confidence in the eurozone has improved on hopes that a deal can be reached to avoid protectionist measures,” analysts at ING noted. “However, caution remains warranted.”
“If part of Trump’s rationale for delaying tariffs on Canada and Mexico was due to the potential immediate economic damage to U.S. consumers, that may not apply to EU tariffs. With regard to European imports, Trump may play the long game, keeping tariffs in place for an extended period to increase pressure on the EU before reaching a deal.”
The GBP/USD pair fell 0.2% to 1.2433, with sterling slightly lower after recovering most of its value despite the strong dollar rally on Monday.
“The UK does not have much at stake in U.S. tariffs. British exports to the U.S. account for less than 2% of GDP, while exports to China are under 1%,” ING said. “Moreover, Trump appears in no hurry to target the UK with tariffs, especially considering that its trade balance with the U.S. is relatively insignificant.”
That said, the Bank of England will hold a monetary policy meeting later this week, where the central bank may cut interest rates to stimulate the struggling economy.
The Offshore Yuan Manages to Stabilize
In Asia, the USD/CNH pair traded down 0.2% to 7.2944, with the offshore yuan stabilizing despite the implementation of 10% tariffs on China, while the levies against Canada and Mexico were postponed.
President Trump is set to speak with Chinese President Xi Jinping later this week, according to the White House, possibly laying the groundwork for a diplomatic resolution that could prevent a broader trade war.
The yuan has struggled amid fears of a renewed U.S.-China trade war, reminiscent of the conflict seen during Trump’s first term.
Meanwhile, the USD/JPY pair rose 0.3% to 155.15, following a sharp decline in overnight trading.
