The U.S. Dollar Index (DXY) is down by 0.67%
to 108.61 this week, with the EURUSD rising by 0.77% to 1.03550. Major
currencies advanced almost uniformly against the Dollar, gaining around 1.5% on
Monday after U.S. President Donald Trump refrained from mentioning tariffs in
his inaugural address. Instead, he focused on record inflation, urging his
Cabinet "to marshal the vast powers at their disposal to defeat" it.
This speech confirmed recent positive
indications from Administration insiders that tariffs would be increased
gradually, avoiding direct confrontation with China. This added significance to
the earlier talks between Trump and China’s leader, Xi Jinping, which the
President described as “good.”
The Federal Reserve (Fed) may now have room to
pause its interest rate-cutting cycle initiated in 2024, as inflation concerns
appear to be easing. However, Trump quickly adopted a more aggressive stance,
stating he is considering imposing an additional 25% tariff on imports from
Canada and Mexico by February 1. In response, the Canadian Dollar erased all
its intraday gains.
Trump also pressured Chinese authorities to
approve the sale of TikTok to a non-Chinese company, threatening an additional
10% tariff on U.S. imports from China if they fail to comply. The President
signed an executive order granting a 75-day extension for TikTok's U.S.
operations but did not rule out further levies during the negotiation process.
Observers have described Trump’s initial day
in office as moderate, and market reactions align with this assessment. U.S.
10-year Treasury yields retreated to 4.57% from 4.60%, after peaking at 4.80%
last week. Market expectations for a 0.25% Fed rate cut in March rose to 30.2%
from 23.3%.
Trump is expected to reappear on Thursday with
an online speech at the World Economic Forum, where new policy statements are
anticipated. However, given his unpredictability, he may dominate headlines
earlier in the week.
Another major development is expected on
Friday, as the Bank of Japan (BoJ) is anticipated to raise interest rates by 25
basis points to 0.5%. The last rate hike by the BoJ, a 15-basis point increase
on 31 July 2024, caused the EURUSD to gain 2.0% within two days. A similar
reaction may occur this time, with the EURUSD already positioned above the
1.02800-1.03000 resistance level and advancing towards 1.04700-1.05700. The
pair is currently at 1.04350 and appears likely to test resistance, with
support established at 1.03400-1.03600, forming a solid base for further upward
movement.
Large investors appear divided. The WisdomTree
Bloomberg US Dollar Bullish Fund (USDU) reported $15.1 million in net inflows
last week, prior to the Trump-Xi talks. However, a shift in positioning seems
imminent, as Monday’s decline in the Dollar suggests partial closures of long
positions. A clearer trend is expected to emerge as the market reacts to
further developments.
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