The dollar strengthened on Monday as traders assessed the impact of U.S. President Donald Trump’s tariff threats and awaited the Federal Reserve’s decision on interest rates later this week.
The dollar index, which measures the currency against six others, stood at 107.6, near a one-month low from the previous week, when tariff fears had temporarily subsided. However, tensions reignited as the U.S. and Colombia narrowly avoided a trade war.
Colombia initially resisted accepting deportees via military flights, prompting Trump to threaten tariffs. In response, Colombia threatened retaliation before ultimately agreeing to accept the flights.
The tariff uncertainty impacted other currencies, with the Mexican peso dropping 0.7% to 20.409 per dollar and the Canadian dollar weakening slightly to 1.4385 per dollar. Trump hinted at potential tariffs on Canada, Mexico, and China starting February 1, fueling inflation worries and bolstering U.S. Treasury yields. Meanwhile, the euro fell 0.2% to $1.0467 ahead of an expected rate cut by the European Central Bank, and sterling traded at $1.2450.
Christopher Wong, a strategist at OCBC, noted that while immediate tariffs are absent, ongoing concerns provide some support for the dollar ahead of the February deadline. The U.S. 10-year Treasury yield dipped three basis points to 4.593%.
Central bank actions remain in focus this week, especially the Federal Reserve’s decision. Although the Fed is widely expected to keep rates unchanged, investors are watching for hints of a potential rate cut if inflation aligns with the 2% target. Recent data showed U.S. business activity slowing to a nine-month low in January, while December’s existing home sales hit a 10-month high.
Elsewhere, the Japanese yen traded at 155.88 per dollar after the Bank of Japan raised its policy rate to the highest level since the global financial crisis and updated its inflation forecasts. Governor Kazuo Ueda signaled further rate hikes but offered little detail on timing. Analysts, including Mark Dowding of RBC BlueBay Asset Management, expect the yen to appreciate as interest rate differentials narrow, given its current undervaluation.
The Australian and New Zealand dollars dipped slightly but remained near recent highs. Australian markets were closed for the day.
Bitcoin, the leading cryptocurrency, slipped to $100,751.90, near a one-week low but still close to last week’s record of $109,071.86. The drop followed Trump’s executive order creating a working group to draft new crypto regulations and explore a potential crypto stockpile. The SEC’s easing of accounting guidelines, previously criticised for hindering crypto adoption, also buoyed sentiment. Despite the pullback, Zann Kwan of Revo Digital Family Office expects a strong rebound in the near term, noting the market remains robust and optimistic.
In summary, the dollar’s strength reflects ongoing tariff concerns, central bank decisions, and shifting market dynamics, with global currencies, crypto markets, and interest rates all under close watch.
