(Bloomberg) -- The dollar fell against almost every major currency and US Treasury yields dropped after Bloomberg News reported that Donald Trump’s incoming economic team is considering gradual hikes in tariffs.
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The Bloomberg Dollar Spot Index slid as much as 0.4%, while the 10-year yield slipped three basis points to 4.75% after a report showed Trump’s economic advisors are discussing a slow and steady approach to tariffs rather than a large one-time increase. Such gradual restrictions could weigh on the dollar as they would slow inflationary pressure and potentially give more breathing room for the Federal Reserve to reduce interest rates.
The pullback in the dollar gauge followed five days of gains that drove it to a two-year high on Monday. The drop was its biggest since Jan. 6, when the greenback fell following a Washington Post story that claimed Trump was planning to pare back tariff plans. The president-elect denied that story in a post on Truth Social.
“Dollar weakness can be sustained unless President Trump denies the reporting like he did in reaction to the report by the Washington Post,” said Carol Kong, a strategist at Commonwealth Bank of Australia.
Risk-sensitive currencies like the Australian and kiwi dollars jumped against the greenback, pointing to a sense of relief that a large tariff shock may be avoided. China’s offshore yuan, a prime selling target for traders betting on US tariffs, initially edged higher after the report.
What Bloomberg Strategists Say...
The US dollar’s dominance shows no signs of abating, setting the stage for a challenging year ahead for Asian currencies.
Mary Nicola, Markets Live Strategist
The dollar’s drop underscores the key role tariffs play in swaying sentiment across the $7.5 trillion-a-day foreign-exchange market. But the move may prove temporary: Most Wall Street banks expect the greenback to strengthen following an 8% rise in 2024, and blowout employment numbers last week have raised further questions about the pace of potential rate cuts.
A reading of producer prices later in the day will offer more clues into US price risks. Economists expect wholesale prices to rise on a monthly and yearly basis, according to a Bloomberg poll, which could support the dollar and keep upward pressure on US yields.
Goldman Sachs Group Inc. sees potential for the dollar to climb 5% or more this year. Speculative traders including hedge funds and asset managers are more bullish on the greenback than they have been since 2019, according to Commodity Futures Trading Commission data compiled by Bloomberg for the week ended Jan. 7.