US dollar (DX=F, DX-Y.NYB) retreated further from nearly two-year highs fell to a one-month low on Friday after President Trump said he would “probably not” impose tariffs on China.
“We have one very big power over China, and that's tariffs, and they don't want them,” Trump said in an interview with Fox News on Thursday. “And I'd rather not have to use it. But it is a tremendous power over China.'
The U.S. dollar index, which measures the dollar's value against a basket of six foreign currencies — the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc — fell more than 0.5% on Friday to end its worst week. in more than a year. Dollar Saw biggest one-day decline since November 2023 earlier this week when the president refrained from enacting blanket tariffs on his first day in office.
Still, the index has gained about 7% since its September lows and is roughly 4% higher since Election Day.
The dollar's price action was largely driven by two main catalysts: the election of Trump and the subsequent Republican sweep, along with the Fed's recalibration of future easing in the face of strong economic data.
But Trump's unknown tariff policy has been the biggest driver in recent weeks and looks set to remain so in the coming months.
President Donald Trump signs an executive order in the Oval Office of the White House on Thursday, Jan. 23, 2025, in Washington. (AP Photo/Ben Curtis) ·RELATED PRESS
Despite the recent downward moves, analysts at Bank of America say it is reasonable for the market to continue to increase tariff risk on the dollar.
“Even if the tariffs are delayed, they are likely to be a key pillar of policy for the new administration,” wrote Adarsh Sinha, head of FX and rates strategist at BofA. “More importantly, uncertainty about the timing of the tariff increase remains.”
Meanwhile, Capital Economics expects the dollar index to rise further this year, noting that after adjusting for inflation, the greenback is at its strongest levels since the signing of the pro-growth international accord, Plaza Accord, in 1985.
“We think US tariff policy and interest rate moves could push the dollar further higher in the coming quarters,” Simon MacAdam, deputy chief global economist at Capital Economics, wrote on Friday.
Kyle Chapman, foreign exchange analyst at the Ballinger Group, added that the dollar “is incredibly sensitive right now to the prospect of tariffs.”
Trump instead refused to enact the tariff order on his first day in office issuance of the memorandum on Monday ordered federal agencies to evaluate US trade policy.
But as reported by Ben Werschkul of Yahoo FinanceTrump's first week in office has seen a series of new tariff threats against nations ranging from Russia to members of the European Union. In the first place, according to Trump, are 25% tariffs on Canada and Mexico and 10% tariffs on China, which could be introduced as early as February 1.
Chapman said the absence of all-day flat rates “is the biggest clue so far that we could be at the peak of the dollar, although I wouldn't get my hopes up just yet.”
The companies already discussed this earnings phenomenon with Netflix earlier this quarter (NFLX), which told investors on Tuesday that about 60% of its revenue comes from non-US dollar currencies. To this point, the company's guidance for the current quarter came in below estimateswhile full-year 2025 sales are expected to slow compared to 2024 as a rising dollar weighs on forecasts.
And those caveats are likely to play out only this earnings season.
S&P 500 companies with international exposure drove most of the earnings growth during the third quarter, according to FactSet data, a worrisome sign that any weakness on the forex front could weigh on overall stock market performance.
However, Capital Economics' MacAdam noted that today's strong dollar “is tomorrow's problem.”
In the short term, a dollar rally “is usually not as damaging as has often been suggested,” MacAdam wrote. He argued that big firms typically hedge against exchange rate movements to prevent drastic hits to growth, while an inverse relationship between the dollar and commodity prices such as energy could serve as a positive catalyst for overall inflation and lower prices for importers.
Over time, however, the increased dollar will weigh on global trade, with tighter global financial conditions, increased overseas inflation and pressure on exports all seen as potential consequences.
“Even if the dollar stops strengthening, the high level of the dollar may still create problems for the world economy,” he warned.
