Dollar Rebounds as Trump Eyes More Canada, Mexico Tariffs

(Bloomberg) — The dollar bounced back after posting its steepest drop in 14 months amid bets that US President Donald Trump’s tariff plans would spur inflation and prevent further interest-rate cuts from the Federal Reserve.

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Bloomberg’s dollar gauge rose as much as 0.7% in Asia Tuesday after slumping in New York trade as Trump said he may enact 25% tariffs on Mexico and Canada in February. Currencies of the two nations fell more than 1% against the greenback before paring the move.

“If 25% tariffs on Mexico and Canada are coming, then surely bigger tariffs on China will be following shortly after,” said Rodrigo Catril, strategist at National Australia Bank Ltd. in Sydney. “The dollar has room to trade higher.”

The dollar had fallen immediately following Trump’s inauguration on bets he would hold off on immediate tariffs. Its sudden subsequent reversal underscores just how jittery traders are on any news around duties and their impact on the global economy. Trump’s earlier pledges, which have included ratcheting up levies to as high as 60% on shipments from China, have sent shock waves through the $7.5-trillion-a-day foreign-exchange market.

The risk of Trump’s high-tariff policy with solid economic expansion is expected to keep the Fed cautious of rate cuts and support the dollar’s resilience. Still, the future scope of Trump’s protectionist trade measures — and the timeline for their actual implementation — remains an open question closely watched by traders.

Overnight-indexed swaps signaled a 69% chance of the Fed cutting the benchmark rate more than once this year, up from 46% on Friday. SMBC Nikko Securities Inc. and Nomura Securities Co. both said US yields may decline further.

Treasuries rallied as global cash trading resumed after Monday’s US holiday, mainly reflecting the president’s decision to avoid imposing China-specific tariffs on his first day in office. The benchmark US yield slid close to 10 basis points to 4.53%.

“Markets were fixated on big tariffs bazookas from day one,” said Shoki Omori, chief global desk strategist at Mizuho Securities. “The absence of that, especially on China, is driving a relief rally for Treasuries.”

The offshore yuan fell as much as 0.4%, dragging the risk sensitive Australian and New Zealand dollars with it. The People’s Bank of China set the yuan reference rate at the strongest level since Nov. 8, in a sign it’s ramping up support for the currency.

“Volatility on the back of Trump’s off-the-cuff comments will be a regular feature,” said Alvin Tan, strategist at RBC Capital Markets. “Trump likes to pontificate, but he doesn’t always follow through on his comments. But the market cannot ignore them either.”

What Bloomberg Strategists Say…

Mark Cudmore, Markets Live Strategist: “Global stocks will climb further and the dollar has more downside because the most important conclusion from President Trump’s initial actions is a more tentative and drawn-out approach to tariffs than threatened, at least for now.”

Click here for the full analysis.

–With assistance from Jaehyun Eom, Anya Andrianova, Carter Johnson and Betty Hou.

(Updates with Fed pricing in 6th paragraph and Treasury moves in 7th.)