The U.S. Dollar Index (DXY) rose by 0.45% to
107.92 points this week, while the EUR/USD declined by 0.60% to 1.04290. The
Dollar strengthened amid a "tariffs roller coaster" sparked by U.S.
President Donald Trump. On Sunday, Trump threatened Colombia with a trade war
after its government refused to accept deported citizens from the United
States. Colombia swiftly capitulated, agreeing to receive deportees within
hours of Trump's warning.
This heightened volatility on Monday, with
EUR/USD initially dropping by 0.36% to 1.04560 at the opening, then rebounding
by 0.76% to 1.05330 before closing neutrally at 1.04900. While the immediate
tariff-related drama seemed to have settled, Trump reignited concerns by
announcing new tariffs on foreign pharmaceuticals, semiconductors, and metals.
The news pushed EUR/USD down by 0.60% to 1.04200.
Despite the tariff threats, U.S. 10-year
Treasury yields held steady at 4.55%, suggesting investors are either awaiting
concrete actions from Trump or anticipating the Federal Reserve's reaction to
these developments.
Both scenarios are plausible. Trump is highly
attuned to market responses, and if his actions negatively impact the stock
market in the long term, he is likely to backtrack. A significant rise in
tariffs could trigger a chain reaction, including higher borrowing costs and
declining equity markets, which runs counter to Trump’s agenda of economic
expansion and market growth. His strategy seems more focused on short-term
victories rather than prolonged trade wars.
However, Trump's brinkmanship carries risks.
Missteps could lead to unintended trade tensions, though investors currently
see no immediate threats. The EUR/USD is expected to resume its upward
trajectory towards 1.09500–1.10500 following a potential correction. Support is
seen around 1.03500–1.03700 as the lowest level in the near term.
The Federal Reserve is set to meet on
Wednesday and is expected to leave interest rates unchanged. However, Chair
Jerome Powell’s press conference may feature hawkish remarks, which could
provide short-term support for the Dollar. Even so, significant Dollar gains
seem unlikely, as Trump could openly criticise the Fed to counteract any
strength in the currency.
The European Central Bank (ECB) will hold its
policy meeting on Thursday, and U.S. Q4 2024 GDP estimates, along with the
December PCE Index, are also due this week. These events will likely be viewed
through the lens of the evolving dynamics between Trump and Powell.
Investor sentiment remains cautious. The
WisdomTree Bloomberg US Dollar Bullish Fund (USDU) reported net inflows of
$2.76 million, indicating that large investors may be positioning for a Dollar
rally during the EUR/USD correction before closing their bets on Dollar
strength.
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