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The dollar fell on Monday after reports that President-elect Donald Trump's administration is considering scaling back a campaign promise to impose sweeping tariffs on imported goods.
The U.S. dollar index, which tracks the currency against a basket of six peers, fell 1 percent in morning trading after The Washington Post reported that potential tariffs may be limited to critical imports.
In November, Trump promised to do so a flat 10 or 20 percent duty with all business partners.
Chris Turner, global head of markets at ING, said the news had sparked a “relieved recovery” in the euro against the dollar, with hopes that carmakers in the region could be spared. Tariffs may also be “less inflationary than originally expected,” he added.
Shares in European carmakers, which have been hit in recent months by fears they will be targeted by the Trump administration, rallied. The Stoxx Europe 600 Automobiles & Parts index rose 3.7 percent BMW increased by almost 6 percent.
The euro gained 1.1 percent to $1.042 against the dollar, on track for its best day in more than a year. The single currency was pushed to a two-year low on trade war fears. The pound, which was the best performer against the G10 currency dollar rose 1 percent to $1.254 last year.
Monday's news “sparked some relief among investors that the initial tariffs won't be as bad as feared,” fueling a “sharp reversal of the U.S. dollar's recent gains,” said Lee Hardman, chief currency analyst at MUFG. More targeted tariffs would help “damp down [their] disruptive impact,” he added.
U.S. Treasuries, which have sold off in recent months as investors braced for higher inflation driven by broad tariffs, have rebounded a bit. The yield on the two-year U.S. Treasury note, which tracks rate expectations, fell 0.02 percentage point to 4.26 percent as the price of debt rose.
The dollar sell-off comes after a strong rally for the world's de facto reserve currency that began in early October as the market began to appreciate the greater prospect of a Trump election victory. “The market correctly predicted a Trump victory,” said Jane Foley, senior FX strategist at Rabobank.
Analysts and economists expect Trump's pro-growth, potentially inflationary policies to limit the number of times the U.S. central bank will cut interest rates next year, boosting demand for the dollar against other major currencies. Added to this were investors' bets that the negative impact of growth on the Eurozone will prompt the European Central Bank to cut rates more aggressively.
In mid-December, the Fed released economic forecasts that suggested interest rates would fall less than originally expected in 2025. Last week, the Fed's top official warned of the threat of a resumption of US inflation after Trump took power.
Investors expect the U.S. central bank to cut rates at least once this year, with a 70 percent chance of a cut in the second quarter. On Monday, that probability increased slightly.
Expectations of a cut in interest rates by the European Central Bank have slightly decreased, this year prices have decreased by less than four quarter points.
