The US dollar gained on Tuesday, recovering from the previous session’s losses following a tech stock selloff, as concerns about trade wars and their impact on global growth resurfaced.
At 04:20 ET (09:20 GMT), the Dollar Index, which measures the greenback against a basket of six other currencies, was up 0.5% at 107.725, though still slightly lower for the week.
Growth Concerns Support the Dollar
The dollar’s rally on Tuesday was fueled by renewed global growth concerns after US President Donald Trump reaffirmed his push for higher universal tariffs.
This has amplified worries about trade wars and their potential negative effects on global growth, boosting the dollar’s appeal as a safe-haven asset.
According to the Financial Times, new Treasury Secretary Scott Bessent is advocating for a gradual increase in universal tariffs, starting at 2.5%, possibly reaching 20%. Trump later suggested he wants “much bigger” tariffs than 2.5%, with potential targeted duties on items like steel, copper, and semiconductors.
“These comments contradict the market’s previously optimistic view that tariffs would be more selective, as seen in cases like Colombia, rather than universally applied,” analysts at ING noted in a report.
“Given that these plans are being actively discussed by the Treasury and not just alluded to by Trump, the risk premium now priced into the dollar may be more persistent than previously thought.”
The dollar had dropped on Monday due to a tech stock selloff, as markets reacted to the launch of a free open-source artificial intelligence model by Chinese startup DeepSeek.
The Federal Reserve is set to conclude its latest two-day policy meeting on Wednesday, with most expectations pointing to no change in interest rates.
ECB Meeting in Focus
In Europe, the EUR/USD pair fell 0.6% to 1.0430, pressured by the dollar’s strength despite a rise in French consumer confidence for January, following improvements in German business sentiment.
“The tariff threat could be taken more seriously given the Treasury’s active planning, significantly limiting the euro’s upside potential,” ING noted.
The European Central Bank will meet on Thursday, where it’s anticipated to cut interest rates once again, having reduced rates four times in 2024.
“Our expectation is that the turmoil in equity markets and the renewed tariff risks will be more significant for EUR/USD than the expected 25bps rate cut and likely dovish guidance,” ING added.
GBP/USD fell 0.5% to 1.2437, with the pound showing weakness ahead of the upcoming Bank of England meeting in early February.
Yen on a “Rollercoaster”
In Asia, USD/JPY rose 0.8% to 155.70, with Tokyo’s inflation data expected to draw attention this week.
“USD/JPY has been on a rollercoaster since the start of the week. The initial market reaction to the tech-led equity selloff seemed to be a perfect setup for a JPY rally: risk-off sentiment and declining USD rates,” ING said.
“However, the dip below 154.0 was short-lived, and the broader dollar rebound—fueled by the return of tariff concerns—has brought USD/JPY back to the 155.50-156.0 range. This reflects the strong link between US protectionism, a hawkish Fed, and its major impact on the rate-sensitive JPY.”
Meanwhile, USD/CNH climbed 0.5% to 7.2837, reflecting continued pressure from US tariff concerns. Onshore markets remained closed for the Lunar New Year holiday.
