Dollar Drop Seen to Be Brief Amid Tariff Worries, US Economic Strength
(Bloomberg) — Traders are wagering that Tuesday’s slump in the dollar will likely prove short-lived, given the backdrop of relative US economic strength and the risks that a trade war could drive investors into havens.
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The Bloomberg Dollar Spot Index fell as much as 0.7% on the day, snapping six straight sessions of gains. The gauge is pulling back from the highest level since 2022, which was reached in Asian trading at the start of the week as speculators braced for US tariffs that were scheduled to take effect Tuesday.
The greenback is giving up those gains after US President Donald Trump’s move on Monday to delay the levies on both Mexico and Canada. The dollar gauge now trades slightly below where it ended last week.
Market watchers, however, largely brushed off Tuesday’s decline as a temporary setback. Nomura International Plc, Brown Brothers Harriman, and HSBC say there’s a strong argument to be long the currency regardless of what happens with Trump’s tariffs, while Commerzbank and Mizuho Bank say continued angst around the outlook for trade is likely to support it.
“If one removes tariffs from the discussion completely there are still good reasons to be long the dollar,” said Antony Foster, head of Group-of-10 FX spot trading at Nomura.
The key for dollar bulls is that the US economy continues to outperform its peers, boosting wagers that the Federal Reserve will forgo further interest-rate cuts until around mid-year and ease by less than the European Central Bank and Bank of England by year-end.
“If we take a step back from the noise of tariffs, you come back still to the US story and for the most part it’s been one of US exceptionalism,” said Daragh Maher, a strategist at HSBC. “The only question is whether you’re layering on a little bit of extra juice on the dollar bull story, courtesy of the trade and tariff angle, or not on a given day.”
Still, the Bloomberg dollar gauge hit its lowest level of the day following a report that US job openings fell in December by more than forecast to a three-month low, indicating a gradual slowdown in the labor market.
Market Relief
Markets are showing some relief that Trump agreed to delay 25% tariffs on Canada and Mexico for a month. But global trade tensions remain, with traders waiting to see how China’s retaliative measures pan out, after Trump’s 10% tariffs on the country took effect Tuesday.
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