Dollar in Decline, Euro Eyes Inflation Data

The U.S. dollar declined on Tuesday, hitting a one-week low after reports suggested President-elect Donald Trump’s tariff policies could be more lenient than initially expected. Meanwhile, the euro gained ground ahead of crucial inflation data.

The dollar index, which tracks the U.S. currency against a basket of six other currencies, was trading 0.3% lower at 107.77 after falling overnight to its weakest level since Dec. 30.

Dollar Continues Its Retreat

The dollar has remained under pressure since the Washington Post reported on Monday that the incoming Trump administration is considering plans to limit tariffs on sectors critical to both national security and the economy.

Although President-elect Trump denied the report via a post on his Truth Social platform, the dollar has struggled to regain its footing.

“The dollar’s inability to recover all of its intraday losses on Monday suggests two factors: first, the market has been heavily favoring the dollar after a nearly continuous three-month rally; second, the perception that there’s no smoke without fire, as the Washington Post report seemed plausible,” said analysts at ING in a note.

Tuesday brings a host of U.S. economic data for investors to digest, including the ISM Non-Manufacturing PMI for December and JOLTS job openings for November, ahead of Friday’s critical U.S. jobs report.

“Investors are unlikely to actively sell the dollar ahead of Trump’s January 20 inauguration, despite speculation of softer tariffs. However, some rebalancing of currency positions and further dollar consolidation may occur in the interim,” ING added.

Euro Rises in Anticipation of Inflation Data

The EUR/USD pair climbed 0.4% to 1.0431 on Tuesday, continuing its upward trajectory after reaching a one-week high on Monday.

The focus in Europe is on the release of the latest Eurozone inflation data, the final price-related report before the European Central Bank (ECB) meeting on January 30. December’s consumer inflation index is expected to have risen 2.4% year-over-year, accelerating from November’s 2.2%.

However, mixed data from individual member states have complicated the outlook. Inflation in Spain and Germany rebounded faster than expected, while France posted a surprise decline.

Investors are currently pricing in a 100-basis-point reduction in ECB interest rates during the first quarter of 2025. If the upcoming data show further easing in inflation, the ECB could gain room for more aggressive monetary easing, potentially pressuring the euro.

GBP/USD Gains Despite Falling UK House Prices

The GBP/USD pair rose 0.4% to 1.2569, building on overnight gains. This occurred despite UK house prices declining unexpectedly in December for the first time since March.

Mortgage lender Halifax reported that house prices fell by 0.2% last month, following a 1.2% rise in November. Year-over-year, prices were up 3.3%, falling short of the 4.2% market estimate.

The Bank of England (BoE) left interest rates unchanged last month after consumer prices surpassed its target. The BoE is expected to proceed cautiously with further rate cuts throughout the year.

Yuan Weakness Persists

In Asia, USD/CNY rose 0.1% to 7.3325, with the yuan remaining under pressure after reaching a 17-year low on Monday.

While the currency regained some ground, it remains fragile due to new U.S. restrictions on Chinese companies, adding further strain on the yuan.

Elsewhere, USD/JPY dipped slightly to 157.56 after hitting its highest level in nearly six months earlier in the session.