The US dollar weakened against most major currencies on Tuesday following a report by Bloomberg News that Donald Trump’s incoming economic team is considering a gradual approach to tariff implementation.
This potential shift away from an aggressive tariff strategy prompted a sell-off in the dollar, with the Bloomberg Dollar Spot Index falling as much as 0.4% in early Asia trading, its largest drop since January 6.
Market Reactions
- Risk-Sensitive Currencies: The Australian and New Zealand dollars gained as investors showed relief that a significant tariff shock might be avoided.
- Chinese Yuan: The offshore yuan, often targeted during tariff-related volatility, advanced against the greenback.
- Investor Sentiment: The gradual tariff approach, if confirmed, could ease inflationary pressures and create room for the Federal Reserve to consider interest rate cuts, reducing the dollar’s appeal.
The reported strategy marks a shift from Trump’s earlier rhetoric, which favored imposing swift and substantial tariffs on US imports. A gradual approach could mitigate the economic and political risks of immediate tariff hikes, including higher consumer prices, stock market instability, and backlash from trade partners and domestic stakeholders.
Experts warn, however, that the dollar’s weakness could be temporary. Robust US economic data, such as strong employment figures, has supported expectations of dollar strength in the medium term.
“Look through the noise,” said Win Thin, global head of currency strategy at Brown Brothers Harriman & Co.
He emphasized that US economic performance alone could sustain a dollar rally.
President-elect Trump faces a pivotal decision between employing established tools for implementing tariffs—like the Section 232 and Section 301 statutes—or invoking the International Emergency Economic Powers Act (IEEPA) for faster action. The latter, though untested for tariffs, could enable sweeping measures but risks significant legal and economic fallout.
Analysts suggest that a slower tariff rollout would allow time for negotiation, industry preparation, and avoidance of unintended consequences. Conversely, a rapid tariff implementation could trigger immediate retaliation from major trading partners, amplifying economic disruption.
Markets remain on edge as mixed signals from the Trump camp suggest uncertainty about the final strategy. A more measured approach could temper inflationary effects and support broader market stability, while an aggressive stance risks exacerbating global trade tensions.
For now, the dollar’s drop reflects the foreign exchange market’s sensitivity to trade policy developments. As Carol Kong, a strategist at Commonwealth Bank of Australia, noted:
“Dollar weakness can be sustained unless President Trump denies the reporting.”
