Trump denies reports of "tariff reduction", dollar falls sharply and regains some lost ground.

On Monday, after U.S. President-elect Trump denied that his tariff plan would not be as widespread as initially feared by the market, the U.S. dollar fell significantly against most major currencies, causing exchange rate fluctuations that hit traders who held large long positions in the dollar at the beginning of the new year. The Bloomberg U.S. Dollar Spot Index closed in New York down 0.6%, having previously fallen over 1%, marking its largest single-day decline since 2023. This came after a report in The Washington Post stated that Trump's aides were studying a tariff plan that would only cover key import products. The euro rose by 1.3% against the dollar at one point, marking its biggest single-day gain in 14 months, while the pound also rose by 1%. Kathleen Brooks, research director at XTB, stated that the initial drop in the dollar was an "overreaction to an unconfirmed report, but it does demonstrate a trend." Brooks said, "We have a lot of long dollar positions at risk of a reversal." Trump wrote on Truth Social that The Washington Post's report about his tariff policy softening was "wrong." As a result, traders reduced their foreign exchange bets and erased gains in bonds. In another post on Truth Social, the President-elect stated that under tariffs, United States Steel Corporation (X.US) would become a "more profitable and more valuable company." Last week, President Biden blocked the merger of United States Steel Corporation with Nippon Steel. Data from the U.S. Commodity Futures Trading Commission (CFTC) since 2003 shows that speculative traders had their largest quarterly increase in bullish expectations for the dollar in the last three months of 2024. The latest data released by the CFTC on Monday showed that non-commercial traders had flipped from having a net short dollar position to holding long positions of around $31.4 billion, the highest level since April of this year. Citigroup strategist Daniel Tobon wrote in a report on Monday, "Trump's 'roaring' on tariffs might end up worse than 'biting,' but we expect the roaring to get louder over the next few weeks. This time, tariffs and trade negotiations might start on day one, so we expect investors to want to hold onto long dollar positions for longer than in 2017." The dollar had benefited from expectations of Trump imposing taxes on major trading partners, damaging currencies including the pound, yuan, and euro. However, a tariff plan limited to key industries such as the defense industry supply chain would have a smaller impact on the global economy and U.S. inflationary pressures compared to a plan covering a broader range of imported products, implying that the dollar still has room to weaken. The Washington Post also reported that Trump is considering a so-called universal tariff plan, which would apply to every country. Foreign exchange strategists Stuart Jenkins, Michael Cahill, and Isabella Rosenberg at Goldman Sachs Group, Inc. wrote in a report on Monday, "In summary, these reports indicate that the incoming new U.S. administration is focusing on inflation risks and considering more targeted preliminary measures than were proposed during the campaign." Since Trump won the election in November last year, his threatened trade policies have been a focus of discussion among investors and economic policymakers. A broad tariff plan could harm global economic growth, raise consumer prices, especially if other jurisdictions take retaliatory measures. Investors will be looking to the U.S. non-farm payroll data for December, set to be released on Friday, for further clues about the prospect of a Fed rate cut. Currently, traders are expecting the Fed to cut rates by around 38 basis points in 2025. Jane Foley, head of foreign exchange strategy at Rabobank in London, stated, "While a reduction in tariffs will be seen as reducing the inflation risk, there is still a lot of uncertainty about tariffs and which goods will be deemed 'key' goods. The uncertainty related to Trump's policies suggests that there could be more volatility ahead."