The dollar declined on Tuesday amid uncertainty over Trump’s monetary policy, although it remained near two-year highs ahead of the release of the first of the week’s relevant inflation data.
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 falls from its highs
The dollar retreated from its highs on Tuesday following a report from Bloomberg that the incoming Donald Trump administration may take a gradual approach to tariffs.
The dollar had received a boost earlier this year after the president-elect made promises to impose steep tariffs on different countries, including a 60% tariff on China, from “day one” of his second presidency.
That said, the U.S. currency remains bullish after a strong jobs report last Friday served to reinforce support for the Fed’s cautious stance toward more monetary policy easing in 2025.
At its December meeting, the Fed reduced the number of expected rate cuts this year to two from four in September, as policymakers fear inflation will remain above target.
This week, attention will focus on the U.S. consumer inflation report due on Wednesday, preceded by the producer price report due later in the session.
“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 was trading 0.1% higher at 1.2214, after falling as low as 1.21 on Monday, its lowest level since November 2023.
The pound has suffered this year as a result of rising bond yields and, consequently, higher borrowing costs, raising fears that the new Labour government may suddenly be forced to curb spending or raise taxes to meet its fiscal rules, which could hit future growth.
There is plenty of British economic data to analyze this week, starting Wednesday with the latest consumer prices.
“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.
The EUR/USD was up 0.1% at 1.0255, slightly above the more than two-year low of 1.0177 seen on Monday.
The single currency has struggled at the start of the year after falling more than &% in 2024 as investors worry about weak economic growth in the region and tariff threats.
Later in the session, confidence data from Germany and the eurozone will be released.
The European Central Bank is expected to cut interest rates by about 100 basis points in 2025, with most of the cuts to be made during the first part of the year.
Bank of Japan meeting approaching
In Asia, USD/JPY rose 0.2% to 157.77 after BOJ Deputy Governor Ryozo Himino mentioned that the central bank will discuss whether to raise interest rates at a meeting next week.
Speculation about further rate hikes by the Bank of Japan has increased in recent weeks, following strong wage growth and household spending data. In addition, inflation in the country has consistently remained above the 2% annual target set by the Bank of Japan in recent times.
USD/CNY traded virtually flat at 7.3311, being close to its highest level since September 2023, amid increased focus on further stimulus measures by Beijing.
The People’s Bank of China will also determine its preferred benchmark lending rate this week.