Market Analysis

Trade Tensions Push Dollar Higher, Euro and Commodities Fall

Amos Simanungkalit · 10 Feb112.5K Views

Image Credit: FXSTREET

The U.S. dollar strengthened on Monday following President Donald Trump's announcement of new 25% tariffs on all steel and aluminum imports. This put downward pressure on the euro as well as the Australian and New Zealand dollars, which are closely tied to commodity markets.

Trump also revealed plans to introduce reciprocal tariffs on Tuesday or Wednesday, matching the rates imposed by other countries. The move heightened fears of a global trade conflict, especially with China set to implement retaliatory tariffs on U.S. goods the same day. Last week, Trump initiated trade disputes by imposing tariffs on Mexico and Canada before temporarily pausing them, while maintaining duties on Chinese imports. Beijing’s measured response signaled potential room for negotiations.

The euro dipped 0.1% to $1.0317, hovering near last week's two-year low of $1.0125, as investors braced for possible U.S. tariffs on Europe. Meanwhile, the Australian dollar fell 0.21% to $0.6264, close to its five-year low, while the New Zealand dollar slipped 0.12% to $0.5649. The Canadian dollar also declined over 0.2%, given Canada’s position as the largest aluminum supplier to the U.S.

Charu Chanana, chief investment strategist at Saxo, noted that traditional market responses may no longer apply since China is no longer a major steel supplier to the U.S. following the 2018 tariffs. She added that while inflation might not be the immediate concern, the broader issue is growing economic uncertainty and a shift toward protectionism.

Beyond trade tensions, investors are focused on upcoming U.S. inflation data set for release on Wednesday, as well as Federal Reserve Chair Jerome Powell's testimony before the House of Representatives on Tuesday and Wednesday, where tariffs are expected to be a key topic. Analysts caution that new tariffs could drive inflation higher, potentially forcing the Fed to keep interest rates elevated.

Market expectations for Fed rate cuts have slightly shifted, now pricing in 36 basis points of reductions this year, down from 42 bps after a strong payrolls report on Friday. Macquarie strategists noted that January’s employment data signals resilience in the labor market and overall economic growth. Given ongoing uncertainties, they revised their forecast, now expecting no rate cuts in 2025, keeping the Fed funds rate within the 4.25% to 4.5% range instead of their previous outlook for a single 25 bps cut in March or May.

The dollar index, which tracks the U.S. currency against six major counterparts, remained steady at 108.23. The British pound was relatively unchanged at $1.23915, while the Japanese yen weakened 0.4% to around 152 per dollar. However, it stayed close to the one-month high it reached on Friday amid rising expectations that the Bank of Japan could raise interest rates this year.