(Bloomberg) — The dollar rebounded after posting its steepest drop in 14 months amid bets that U.S. President Donald Trump’s tariff plans would spur inflation and prevent further interest rate cuts by the Federal Reserve. .
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The Bloomberg dollar gauge rose as much as 0.7% in Asia on Tuesday after falling in New York trading as Trump said he could enact 25% tariffs on Mexico and Canada in February. The currencies of the two nations fell more than 1% against the dollar before slowing the movement.
“If 25% tariffs are imposed on Mexico and Canada, higher tariffs on China will surely follow soon after,” said Rodrigo Catril, a strategist at National Australia Bank Ltd. in Sydney. “The dollar has room to rise.”
The dollar had fallen immediately after Trump’s inauguration on bets that he would postpone immediate tariffs. Its subsequent sudden change underscores how nervous traders are about any news about the tariffs and their impact on the global economy. Trump’s previous promises, which have included raising taxes by up to 60% on shipments from China, have sent shockwaves through the $7.5 trillion-a-day foreign exchange market.
The risk of Trump’s high tariff policy with a strong economic expansion is expected to keep the Federal Reserve cautious about rate cuts and support the dollar’s resilience. Still, 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 index swaps indicated a 69% chance that the Federal Reserve will cut the benchmark rate more than once this year, up from 46% on Friday. SMBC Nikko Securities Inc. and Nomura Securities Co. said U.S. yields could continue to fall.
Treasuries rallied as global cash trade resumed after Monday’s U.S. holiday, mainly reflecting the president’s decision to avoid imposing targeted tariffs on China on his first day in office. The US benchmark yield fell nearly 10 basis points to 4.53%.
“Markets were obsessed with big tariff bazookas from day one,” said Shoki Omori, chief global desk strategist at Mizuho Securities. “The absence of that, especially in China, is driving a relief rally for Treasuries.”
The foreign yuan fell as much as 0.4%, dragging down the risk-sensitive Australian and New Zealand dollars. The People’s Bank of China set the yuan reference rate at the highest level since Nov. 8, in a sign of increasing support for the currency.