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The dollar fell to a one-month low against a basket of currencies on Friday after US President Donald Trump suggested a potentially softer stance on tariffs against China and called for interest rates to fall.
The dollar index fell 0.5 per cent to its lowest level since mid-December, after Trump said he would “rather not” hit China with tariffs.
He also said he knew rates “much better” than the Federal Reserve and would like to see them fall “a lot”.
The euro, which has fallen sharply in recent months, jumped 0.7 per cent to $1.049, putting it on course for its largest weekly gain since November, while sterling gained 0.6 per cent at $1.243.
“The main driver of the reversal of US dollar strength this week has been the scaling back of investor fears over disruption to global trade from Trump’s tariff plans,” said Lee Hardman, senior currency strategist at MUFG, adding that these fears have “eased further” overnight on the China comments.
“At the same time, the correction lower for the US dollar has been encouraged by a drop in US [bond] yields,” he said, citing Trump’s comments on rates.
The resilience of the US central bank to pressure from the new president is a core theme for this year, fund managers say.
“The pressure is going to be huge on the Fed,” said Olivier De Larouzière, chief investment officer for global fixed income at BNP Paribas Asset Management.
There are “good reasons” for investors in the coming quarters to start to price in rate rises for 2026, he added, and so the market will be “closely monitoring” the Fed’s communications over the coming months to see whether the Trump rhetoric is stopping that tightening bias coming through.
Trump’s remarks come just days before the Fed’s first policy meeting to be held during his administration.
However, markets have been betting since early October that Trump’s proposals for trade tariffs and tax cuts would stoke inflation, pushing the Fed to keep interest rates higher for longer.
The US central bank is widely expected to keep interest rates at their current level of 4.25 to 4.5 per cent, after three consecutive cuts since September. Markets priced in a slightly greater chance of earlier rate cuts this year after Trump’s remarks. They are fully pricing in a 0.25 percentage point rate cut by the Fed by July.
Despite the US president’s efforts to steer monetary policy lower, some investors believe the central bank will have limited room to cut further, with the dollar expected to continue its rally of recent months.
Dan Ivascyn, chief investment officer at $2tn asset manager Pimco, told the Financial Times this week that the Fed was poised to keep rates on hold “for the foreseeable future” and could even increase borrowing costs.
According to analysts at Brown Brothers Harriman, the Fed has “very little room to ease policy further, which is dollar supportive”.
Asian currencies including the Japanese yen and Indian rupee strengthened against the dollar following Trump’s comments. The offshore Chinese yuan gained 0.5 per cent to Rmb7.25 to the dollar, its highest level since late November.
In early January the Chinese currency breached the 7.30 level as traders positioned for the impact of tariffs on Chinese exports to weaken the currency, but it has strengthened since Trump’s inauguration.
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