Trump Is Crushing the Dollar

The U.S. Dollar Index (DXY) is down by 0.67% to 108.61 this week, with the EURUSD rising by 0.77% to 1.03550. Major currencies advanced almost uniformly against the Dollar, gaining around 1.5% on Monday after U.S. President Donald Trump refrained from mentioning tariffs in his inaugural address. Instead, he focused on record inflation, urging his Cabinet "to marshal the vast powers at their disposal to defeat" it.

This speech confirmed recent positive indications from Administration insiders that tariffs would be increased gradually, avoiding direct confrontation with China. This added significance to the earlier talks between Trump and China’s leader, Xi Jinping, which the President described as “good.”

The Federal Reserve (Fed) may now have room to pause its interest rate-cutting cycle initiated in 2024, as inflation concerns appear to be easing. However, Trump quickly adopted a more aggressive stance, stating he is considering imposing an additional 25% tariff on imports from Canada and Mexico by February 1. In response, the Canadian Dollar erased all its intraday gains.

Trump also pressured Chinese authorities to approve the sale of TikTok to a non-Chinese company, threatening an additional 10% tariff on U.S. imports from China if they fail to comply. The President signed an executive order granting a 75-day extension for TikTok's U.S. operations but did not rule out further levies during the negotiation process.

Observers have described Trump’s initial day in office as moderate, and market reactions align with this assessment. U.S. 10-year Treasury yields retreated to 4.57% from 4.60%, after peaking at 4.80% last week. Market expectations for a 0.25% Fed rate cut in March rose to 30.2% from 23.3%.

Trump is expected to reappear on Thursday with an online speech at the World Economic Forum, where new policy statements are anticipated. However, given his unpredictability, he may dominate headlines earlier in the week.

Another major development is expected on Friday, as the Bank of Japan (BoJ) is anticipated to raise interest rates by 25 basis points to 0.5%. The last rate hike by the BoJ, a 15-basis point increase on 31 July 2024, caused the EURUSD to gain 2.0% within two days. A similar reaction may occur this time, with the EURUSD already positioned above the 1.02800-1.03000 resistance level and advancing towards 1.04700-1.05700. The pair is currently at 1.04350 and appears likely to test resistance, with support established at 1.03400-1.03600, forming a solid base for further upward movement.

Large investors appear divided. The WisdomTree Bloomberg US Dollar Bullish Fund (USDU) reported $15.1 million in net inflows last week, prior to the Trump-Xi talks. However, a shift in positioning seems imminent, as Monday’s decline in the Dollar suggests partial closures of long positions. A clearer trend is expected to emerge as the market reacts to further developments.