(Bloomberg) — The dollar rebounded again after posting its biggest drop in 14 months amid bets that U.S. President Donald Trump’s tariff plans will stimulate inflation and prevent further interest rate cuts from the Federal Reserve.
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The Bloomberg dollar gauge rose as much as 0.7% in Asia on Tuesday after trade fell in New York as Trump said he may impose 25% tariffs on Mexico and Canada in February. The currencies of both countries fell by more than 1% against the dollar before curtailing this movement.
“If 25% tariffs are imposed on Mexico and Canada, larger tariffs on China will almost certainly follow soon after,” said Rodrigo Catril, a strategist at National Australia Bank Ltd. in Sydney. “The dollar has room to trade higher.”
The dollar fell immediately after Trump’s inauguration on bets that he would delay imposing immediate tariffs. Its subsequent sudden reversal underscores how anxious traders are about any news about the tariffs and their impact on the global economy. Trump’s previous pledges, which included increasing duties to 60% on shipments from China, sent shockwaves through the $7.5 trillion daily foreign exchange market.
The risks of Trump’s high tariff policy combined with a strong economic expansion are expected to keep the Fed cautious about interest rate cuts and support the dollar’s resilience. However, the future scope of Trump’s protectionist trade measures – and the timeline for their actual implementation – remains an open question that traders are watching closely.
Overnight swaps indicated a 69% chance the Fed will cut its key interest rate more than once this year, up from 46% on Friday. SMBC Nikko Securities Inc. said: and Nomura Securities Co., Ltd. US yields may fall further.
Treasuries rose as global cash trading resumed after the US holiday on Monday, mainly reflecting the president’s decision to avoid imposing China-specific tariffs on his first day in office. The benchmark US yield fell nearly 10 basis points to 4.53%.
“Markets have been fixated on the big tariffs since day one,” said Shoki Omori, chief global strategist at Mizuho Securities. “The absence of that, especially with respect to China, leads to higher Treasury prices.”
The offshore yuan fell by as much as 0.4%, pulling with it the risk-sensitive Australian and New Zealand dollars. The People’s Bank of China set the yuan’s reference rate at its strongest level since November 8, a sign it is increasing support for the currency.
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