Dollar bounces back as Trump sees more Canada, Mexico tariffs

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

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Bloomberg’s dollar gauge rose as much as 0.7% in Asia on Tuesday after a drop in New York trade as Trump said he may impose 25% tariffs on Mexico and Canada in February. The currencies of the two nations fell more than 1% against the dollar before the move was paired.

“If the 25% tariffs on Mexico and Canada come, then surely bigger tariffs on China will come 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 after Trump’s inauguration on bets he would delay immediate tariffs. Its sudden reversal underlines how nervous traders are about any news surrounding duties and their impact on the global economy. Trump’s past promises, which have included raising tariffs to as high as 60% on shipments from China, have sent shockwaves through the $7.5 trillion-a-day currency market.

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

Overnight indexed swaps signaled a 69% chance the Fed will cut the benchmark interest rate more than once this year, up from 46% on Friday. SMBC Nikko Securities Inc. and Nomura Securities Co. both said US interest rates may fall further.

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

“Markets were fixated on big tariff bazookas from day one,” said Shoki Omori, chief global desk strategist at Mizuho Securities. “The absence of that, especially in China, is driving a bailout 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 benchmark rate at the strongest level since November 8, in a sign that it is increasing support for the currency.