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The US dollar saw a decline on Monday as anticipation grew ahead of Donald Trump’s inauguration. Reports from the incoming administration suggested that there would be a delay in imposing trade tariffs on major US trading partners, causing the currency to drop by 1% against a basket of six peers in London trading.
This development marked the largest daily decline in over five months for the US dollar. The incoming officials indicated that Trump would be assessing trade relationships with Mexico, Canada, and China, but would not be rushing to impose new tariffs.
Chris Turner, head of financial markets research at ING, noted, “The dollar has been strengthening based on expectations of immediate tariff implementations by the new Trump administration. However, recent reports suggest a more cautious approach.”
Traders had anticipated that Trump’s proposed tariffs and tax cuts would lead to inflation, prompting the Federal Reserve to maintain higher interest rates for a longer period. As a result of the news, the euro and sterling surged, with gains of 1.2% and 1.1% respectively.
The Mexican peso also rose by 1.2% while the Canadian dollar saw a 0.9% increase, its strongest performance since May 2023. Brad Bechtel, global head of FX at Jefferies, remarked, “The dollar has been overbought for weeks now, and a correction was inevitable.”
With Wall Street closed on Monday, US government bonds experienced a sell-off due to expectations of the inflationary impact of tariffs on the economy. ING’s Turner commented, “The FX market had anticipated increased volatility, and that prediction is now being realized.”
JPMorgan strategist James Nelligan noted that the immediate absence of tariff implementation would temporarily weaken the dollar. However, he suggested that aggressive tariffs could still be on the horizon once trade relationship reviews are completed by federal agencies.