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The Bloomberg Dollar Spot Index sank 1.1%, the most in 14 months, on Monday as most other US financial markets were closed for a holiday. The bulk of the move came early in the session after a Wall Street Journal reported Trump would stop short of imposing new tariffs on his first day in office.
“Markets are breathing a collective sigh of relief that Trump won’t start his presidency with aggressive tariffs that could rattle the markets once more,” said Valentin Marinov, head of G-10 FX strategy at Credit Agricole CIB.
The dollar’s weakness helped boost foreign currencies, pushing the euro up as much as 1.6% to $1.0434. The Canadian dollar, Chinese yuan and Mexican peso, which investors view as highly exposed to US tariffs, rallied at least 1% each. Earlier, the Mexican currency briefly pared its advance as Trump pledged to make immigration a key focus in his first hours in office, saying he would call a national emergency on the southern border and send troops.
Elsewhere, a gauge of emerging-market currencies closed 0.3% higher, the best day since September.
The sharp decline in the dollar on Monday appeared to catch some speculative currency traders off-guard, underscoring the risk of large market swings. Betting on a stronger dollar has become one of the market’s favored trades following Trump’s election victory, with wagers tied to further greenback gains recently reaching the highest since 2019, according to the latest Commodity Futures Trading Commission data.
Solid economic expansion in the US has also supported the greenback, giving the the Fed room to lower rates more cautiously — even as sputtering foreign economies force local policymakers to keep their policies more supportive.
“I expect that Trump’s policies will be pro-dollar, but implementation could be noisy,” said Brad Bechtel, global head of FX at Jefferies, ahead of the inauguration. “It could result in volatility in the dollar and US Treasury market.”
Earlier in the session, call between Trump and Chinese President Xi Jinping on Friday started to ease jitters over trade tensions between the two nations. Bloomberg News reported on Monday Trump will not unveil China-specific tariffs on his first day in office, citing people familiar with the plans. The yuan rose to its highest in about a month offshore.
The prospect of higher US tariffs together with a flailing economy had battered China’s currency. Yuan weakness has also constrained the People’s Bank of China from further policy easing as interest-rate cuts would exacerbate its yield gap with the US, putting further pressure on.
“It is likely that there is a lot of USD positive news in the price, so a knee-jerk reaction is not wholly surprising,” said Jane Foley, head of G10 FX strategy at Rabobank. “It does signal that the USD may be ripe for a larger pullback if the newsflow provides another trigger or two.”
