Dollar retreats ahead of Trump’s inauguration; euro rebounds from record lows

Interest rates are asleep today and US dollar has made big declines in the beginning of this week as it wants to face with a giant political shift with Donald Trump back to the president. The Dollar Index — which gauges the dollar’s stregnth against a basket of six other currencies — fell by 0.3%, closing at 108.925. Even with this decline, the dollar has stayed near it recent highs, which it reached only a week ago.

Dollar Dynamics

The dollar pullback comes after a strong performance, with the dollar up about 4% since the US presidential elections in November. Market participants have wondered whether Trump’s economic plans will be inflationary, leading the Federal Reserve to need to keep interest rates higher for longer. Yet trading volumes will likely be thinner this Monday due to the US Martin Luther King Jr. Day holiday. Investors await Trump’s inaugural address, which he’s expected to deliver on the first day back in office, when he is expected to unveil a slew of executive orders.

“The financial markets are watching closely to see what executive orders the new president announces,” ING analysts noted this morning, especially with regard to tariffs and trade relations with key international partners. They also pointed out that after all the speculation had driven up the dollar for months, and the dollar was now facing some profit-taking in the market, a still very notable interest existed to purchase dollars.

Euro’s Resilience

The euro has stabilized a bit on the European front; the EUR/USD pair is trading 0.3% higher at 1.0313. But it remains close to a two-year low, mainly on concerns of potential trade wars. “Very likely,” European Central Bank member Isabel Schnabel recently made clear, is the only proper response to a trade war, and investors are concerned.

Also, ING noted that the prediction markets show a low probability of EU tariffs over the short run, but warned that the current FX market does not seem fully priced for general tariffs that would negatively impact the euro were they to go into effect.

So far today, we’ve also seen German economic data; producer prices rose just 0.8% year-on-year in December, less than the expected 1.1% increase. Since June 2023, the European Central Bank has reduced interest rates four times and will likely do so again in the months ahead as eurozone inflation cools, falling from double digits to just above the targeted 2%.

British Pound Performance

The British pound has eked out a gain against the dollar, up 0.1 percent at 1.2193. Yet the currency has lost almost 3% in the last month, dragged down by lackluster data that point to deeper interest rate cuts ahead. The Bank of England has already cut rates twice in 2024 and is widely expected to announce further reductions in its February policy meeting.

Japanese Yen and Asian Markets

In Asia, the USD/JPY ticked 0.1% lower to 156.19 amid expectations of an interest rate hike from the Bank of Japan at its next meeting. A raise in BoJ rates is expected, barring any worsening in market turmoil created by the political transition in the US.

The Chinese yuan also ticked weaker against the dollar, with USD/CNY down 0.2% to 7.3143. This follows the People’s Bank of China’s decision to hold its loan prime rates steady to help a struggling yuan and boost liquidity as it works to revive the economy. Despite these efforts, market mood toward the yuan is still cautious.