Dollar Strengthens Amid Talks of Additional Tariffs, Euro Loses Ground

The US dollar rose on Monday after the US president threatened to impose new tariffs on metal imports, boosting demand for safe-haven assets, while the euro lost ground.

The dollar index, which tracks the US currency against a basket of six other currencies, was trading 0.2% higher at 108.140.

Dollar Gains Ground on Trade War Fears

Concerns over a possible global trade war intensified on Monday after President Trump announced new 25% tariffs on all aluminum and steel imports to the United States, set to take effect later that day.

The US president also stated that he would impose reciprocal tariffs on major trading partners.

Trump initiated a trade war the previous week, first imposing tariffs on both Canada and Mexico before suspending them, while maintaining tariffs on Chinese products.

China’s retaliatory tariffs on US goods are set to take effect later in the session.

“Needless to say, the great uncertainty surrounding the nature, timing, and magnitude of these tariffs is likely to keep the dollar supported this week,” ING analysts wrote in a note.

“The main threat to long dollar positions could be a reassessment of the European outlook if expectations of a ceasefire between Russia and Ukraine increase later this week.

However, at the moment, we doubt that investors will reduce their overweight positions in the dollar, and we could see the DXY approaching the top of its 108-109 trading range at the start of the week.”

Beyond Trump’s trade policies, investors will focus on US inflation data, scheduled for release on Wednesday, as well as Federal Reserve Chairman Jerome Powell’s testimony before the House of Representatives on both Tuesday and Wednesday.

Euro and Pound Lose Ground

In Europe, the EUR/USD pair fell 0.1% to 1.0316, slightly above the more than two-year low it reached the previous week, as investors braced for the tariffs Trump has repeatedly threatened to impose on Europe.

“It is possible that it will drop to 1.0225 if ‘reciprocal’ tariffs affect the EU or some major European countries. Additionally, Wednesday’s US CPI release poses another downside risk for EUR/USD,” ING analysts noted.

The GBP/USD pair also declined 0.1% to 1.2397, following the Bank of England’s quarter-point interest rate cut the previous week, with the pound sterling further pressured by speculation over additional tariffs.

“Tomorrow could see a renewed focus on the Bank of England’s easing cycle,” ING analysts added. “Former hawk, now possibly dove, Catherine Mann is set to give a speech on the UK outlook. Understanding why she voted for a 50-basis-point rate cut last week could provide insight into whether others might follow suit.”

Yen Retreats Considerably

In Asia, the USD/JPY pair surged 0.6% to 152.37, marking a strong rebound from its lowest level since early December.

The yen had strengthened considerably the previous week, as strong wage data and hawkish comments from the Bank of Japan (BoJ) led traders to expect further interest rate hikes in the coming months.

The Bank of Japan raised rates by 25 basis points in January.

However, weaker-than-expected current account data, which showed a sharp decline in Japan’s current account surplus, dampened the yen’s momentum.

Meanwhile, USD/CNY rose 0.3% to 7.3074, weighed down by tariff concerns and weaker-than-expected inflation data released on Sunday.

The data showed that consumer price inflation (CPI) grew less than expected, while the producer price index (PPI) continued to decline, underscoring China’s fragile economic recovery.