NEW YORK: The US dollar edged lower on Tuesday as President Donald Trump’s tariff threats were interpreted more as a negotiating tactic rather than an end goal, a day after he suspended planned measures against Mexico and Canada.
However, the new Trump administration imposed additional 10% tariffs on imports from China effective from early Tuesday and currency analysts said they expected high sensitivity to tariff developments and volatility to persist.
The US dollar index, a measure of the value of the greenback relative to a weighted basket of six major foreign currencies, was down 0.43% at 108.12 while the Canadian dollar was weaker and the Mexican peso was stronger.
“We’re still looking at these 10% tariffs on China and China’s retaliation, which is going to add some risk premium back into the market,” said Helen Given, FX trader at Monex USA. “We’ll see if there’s any sort of negotiation on the back end that might tamp these down as we saw with Mexico and Canada. But as it looks right now, the trade war with China is back up and running.”
The euro rose slightly, with Washington threatening that the European Union may be next in line for trade levies, which are widely expected to push up US inflation, supporting the dollar by keeping US interest rates higher for longer.
“That Trump wants to negotiate is clear,” said Marcus Widen, an economist at SEB.
“But at the same time, there is a basic idea that tariff revenues should finance tax cuts, and from that perspective, one could wonder if one can go back on tariff plans every time.”
Beijing on Tuesday imposed tariffs on some US imports in a swift response to new US duties on Chinese goods, raising the stakes in a showdown between the world’s top two economies.
“It suggests that China is wary of pushing back too hard against Trump’s latest tariffs and is leaving the door open for future negotiations,” said Lee Hardman, senior currency analyst at MUFG.
The Chinese yuan edged up 0.27% to 7.2796 per dollar in offshore trading. There is no official yuan trading until Wednesday, with mainland markets still closed for Lunar New Year festivities.
The Australian dollar, which often acts as a liquid proxy for the yuan because the Australian economy is highly exposed to China, rose 0.28% to $0.625, well above Monday’s low of $0.6085, the weakest level since April 2020. The euro rose 0.28% to $1.037, with market participants watching parity.
“The maximum trade war risk premium seen during the first Trump administration was six big figures which would take the euro/dollar to parity,” said George Saravelos, head of forex research at Deutsche Bank.
“A European Central Bank (terminal rate) repricing down to 1.50%, with the Fed (policy path) unchanged, would take the euro/dollar further down to 0.98-0.99 based on current betas.”
Several analysts recently said that US tariffs would have a deflationary effect on the euro area.
The Canadian dollar lost 0.46% to C$1.436 against its US counterpart, following a sharp rebound from a low of C$1.4792 on Monday, the weakest level since 2003.
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