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The dollar was on course for its biggest weekly fall in more than a year 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 slid 0.7 per cent against a basket of currencies after Trump said he would “rather not” hit China with tariffs. Over the week, it has lost 1.8 per cent, its worst performance since July 2023.
Trump also reiterated calls for looser monetary policy, saying 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 0.9 per cent to $1.051, putting it on course for its largest weekly gain since November 2022. Sterling also gained 0.3 per cent to $1.249, on course for its strongest week in more than two years.
“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 had “eased further” overnight on the China comments.
Mexico’s peso, which has been hit hard by tariff worries, rose 0.6 per cent to 20.3 per dollar, poised for its best week in four months.
Adarsh Sinha, strategist at Bank of America, said there was a persistent gap between where interest rates suggested the dollar should trade, which would be below its current price, and the level if the risk of tariffs were priced in — a threat still expected to loom large despite Trump’s latest comments.
“Even with tariffs delayed, they are likely to be a key policy pillar for the new administration,” Sinha added. “More importantly, uncertainty remains high with President Trump.”
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 were “good reasons” for investors in the coming quarters to start to price in rate rises for 2026, he added, and so the market would be “closely monitoring” the Fed’s communications over the coming months to see whether the Trump rhetoric was 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 potentially hold off from further rate cuts.
The US central bank is widely expected to keep rates at their current level of 4.25 per cent to 4.5 per cent next week after lowering them by a full percentage point since September.
Investors priced in a slightly greater chance of earlier rate cuts this year after Trump’s remarks. Another quarter-point cut is expected in June or July.
Despite the 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.
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.
