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The US dollar tumbled on Monday ahead of Donald Trump’s inauguration, after the incoming president’s officials indicated he would not immediately launch trade tariffs against some of the US’s largest trading partners.
The currency dropped 1 per cent against a basket of six peers in London afternoon trading, putting it on course for its biggest daily decline in more than five months.
The fall came as senior officials in the incoming administration told reporters that Trump intended to evaluate trade relationships with Mexico, Canada and China, but signalled that he would stop short of rapidly imposing fresh tariffs.
“The dollar has been rallying for four months on the view that the new Trump administration would hit the ground running when it came to tariffs,” said Chris Turner, head of financial markets research at ING. “These early reports are pointing to a more measured approach.”
Markets have been betting since early October that Trump’s proposals for trade tariffs and tax cuts would stoke inflation, pushing the Federal Reserve to keep interest rates higher for longer.
The euro and sterling leapt, adding 1.2 per cent and 1.1 per cent respectively — on track for their best days since November and December 2023 respectively.
The Mexican peso added 1.2 per cent. The Canadian dollar rose 0.9 per cent, putting it on course for its strongest day since May 2023.
“The dollar was very overbought and has been for weeks now. A correction was coming,” said Brad Bechtel, global head of FX at Jefferies.
Wall Street is closed on Monday. US government bonds have sold off recently, partly in anticipation of the inflationary impact of tariffs on the US economy.
“The one thing the FX market had expected was more volatility,” said ING’s Turner. “And we’re certainly seeing that.”
James Nelligan, a strategist at JPMorgan, wrote on Monday that “no tariff implementation immediately . . . would be a short-term disappointment to the dollar and it has understandably kneejerked weaker in sympathy.”
However, he added that there was still scope for “potentially aggressive tariffs down the line once the reviews of trade relationships by federal agencies have taken place”.
