Dollar Weakens Before Employment Report; Trump Denies Tariff Plan

The US dollar slipped back on Monday, giving up some of its recent gains but still remaining near a two-year high. This change comes as traders look ahead to the release of important employment figures later in the week, particularly as President Donald Trump's inauguration approaches.

As of 14:50 ET (19:50 GMT), the Dollar Index, which measures the dollar against a group of six other major currencies, was down 0.6% at 108.115. This decline follows a surge to a more than two-year peak last week.

Dollar Faces Early Week Challenges

The dollar has started the week on a weaker note, as market participants await Friday’s report that will provide insight into the state of the US economy. Analysts anticipate that the report will reveal an addition of 154,000 jobs in December, with the unemployment rate expected to remain steady at 4.2%.

This projected outcome would suggest an average increase of about 180,000 jobs per month for 2024, highlighting a slowdown compared to the recent years but still showcasing a resilient labor market.

Market forecasts indicate that such figures are unlikely to prompt significant changes to the Federal Reserve’s policies on interest rates. The central bank has already indicated it may only implement two rate cuts this year, a reduction from previous estimates of four.

In addition, the dollar has gained some safe-haven status amid uncertainties surrounding President-elect Donald Trump’s planned import tariffs, tax reforms, and immigration policies set to take effect after his inauguration on January 20.

The Washington Post reported that Trump's team is considering imposing tariffs on imports from every country, focusing mainly on essential goods. However, Trump quickly refuted this report via social media, asserting that claims about his tariff strategy were incorrect and affirming that his plans would not be diminished.

Analysts from ING commented that while the dollar may lose some strength this week, regular market conditions could lead to a modest adjustment due to slightly lower rates. However, the factors surrounding Trump's impending inauguration and the Federal Reserve's hawkish stance may keep any potential decline in the dollar short-lived.

European Currency Reacts to Economic Data

In Europe, the euro gained 0.7% to 1.0387, buoyed by a slight recovery in the eurozone’s services sector in December. According to HCOB's final Purchasing Managers Index (PMI) report for the area, the index rose to 49.6 in December from a previous figure of 48.3 in November.

This gain was supported by the services sector, which saw its PMI rise to 51.6, indicating growth after dipping below the breakeven point in November. However, a sharp decline in manufacturing output weighed on overall prospects for the eurozone's economic health.

Last week, the euro fell to its lowest level against the dollar in over two years as traders anticipated significant interest rate cuts by the European Central Bank in 2025, with estimates suggesting at least 100 basis points of easing.

Additionally, Germany’s Consumer Price Index increased by 0.4% from the previous month, marking a recovery compared to the earlier decrease, further illustrating price pressures in the eurozone.

Asian Currencies Struggle

In Asia, the Chinese yuan decreased by 0.4% to 7.3483, reaching the highest level it has seen since early 2008. The yuan's drop has been attributed to ongoing economic hurdles and a growing yield gap with the US.

To address concerns over further depreciation, the People's Bank of China reaffirmed its commitment to supporting the yuan, setting a stronger daily reference rate than the critical 7.2 per dollar mark.

Despite rapid growth in China's economy, recent data released on Monday did not bolster the yuan as expected. Meanwhile, the Japanese yen grew by 0.2% to 157.5 due to steady demand and business expansion.

Other currencies also fluctuated, with the Canadian dollar dipping by 0.5% to 1.4371 following an announcement from Prime Minister Justin Trudeau regarding his resignation.

Dollar, Employment, Tariffs, Euro, Economy