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The US dollar fell on Monday ahead of Donald Trump's inauguration, after the incoming president's officials indicated he would not immediately launch trade tariffs against some of the United States' largest trading partners.
The currency fell 1 percent against a basket of six peer currencies in afternoon trading in London, putting it on track for its biggest daily decline in more than five months.
This decrease came at a time when senior officials in the incoming administration told reporters that Trump intends to evaluate trade relations with Mexico, Canada and China, but indicated that he would not go so far as to impose new tariffs quickly.
“The dollar has been rising for four months on the back of the view that the new Trump administration will hit the ground running when it comes to tariffs,” said Chris Turner, head of financial markets research at ING. “These early reports suggest a more measured approach.”
Markets have been betting since early October that Trump's proposals for trade tariffs and tax cuts would stoke inflation, prompting the Federal Reserve to keep interest rates higher for longer.
The euro and pound jumped 1.2 percent and 1.1 percent, respectively, on track to have their best days since November and December 2023, respectively.
The Mexican peso rose 1.2 percent. The Canadian dollar rose 0.9 percent, putting it on track for its strongest day since May 2023.
“The dollar was very overbought and had been for weeks. A correction was coming,” said Brad Bechtel, global head of FX at Jefferies.
Wall Street is closed on Monday. US government bonds have witnessed heavy selling recently, partly due to expectations of the inflationary impact that tariffs will have on the US economy.
“The only thing the FX market expected was more volatility,” ING's Turner said. “We definitely see that.”
James Nelligan, a strategist at JP Morgan, wrote on Monday that “no tariff implementation immediately… would be a disappointment for the dollar in the short term, and his sympathy has understandably declined.”
However, he added that there was still room “for potential tariffs following reviews of trade relations by federal agencies.”
