Trump will not immediately impose new tariffs, the US dollar falls sharply, and emerging currencies rise.

As Donald Trump was sworn in as President of the United States, media reports that Trump would not impose new tariffs on his first day in office caused the dollar to fall. On Monday, the Bloomberg Dollar Spot Index fell 1.1%, marking the largest drop in 14 months, as other US financial markets were closed for the holiday. The softening of the dollar helped boost other foreign currency exchange rates, pushing the euro to rise 1.6% against the dollar to 1.0434. Valentin Marinov, head of FX strategy for France's Agricultural Credit Bank, stated: "The market collectively breathed a sigh of relief because Trump is unlikely to adopt aggressive tariff measures that could disrupt the market at the beginning of his term." Emerging market currencies strengthened with Trump not announcing new tariffs during his inauguration. An index tracking emerging market currencies rose on Monday, with the MSCI Emerging Market Currency Index climbing 0.7% intraday and then adjusting to a 0.3% increase by the closing bell, showing its best performance since September of last year. The Hungarian forint and Polish zloty were among the leaders. Currencies like the Canadian dollar, Chinese yuan, and Mexican peso, which are seen as more vulnerable to US tariffs, also rose by at least 1%. Emerging market stocks also rose, with the MSCI Emerging Market Stock Index up 1.2%. Brad Bechtel, head of FX at Jefferies, said: "This seems to be a positive response to the idea that Trump may not be as tough on tariffs at the beginning of his term as initially thought." The Mexican peso, which initially surged, later narrowed its gains. Trump promised to address immigration as a priority after taking office, declaring a national emergency at the southern border and sending troops, causing the peso to briefly give back its gains. He also classified Mexican drug cartels as terrorist organizations. Bernd Berg, FX strategist at In Touch Capital Markets, said: "While it may seem that the golden age of the United States has begun, it is still unclear what this means for Mexico, so the Mexican exchange rate could continue to fluctuate dramatically like a rollercoaster in the coming days." Marco Oviedo, strategist at XP Investimentos, said Trump's speech was "somewhat neutral for emerging markets, as he did not mention any specific trade policies." Oviedo added that these reports were "currently good news" and that Trump may be evaluating how best to handle the issue, suggesting a more selective approach. Trump's remarks laid the groundwork for his administration's promised comprehensive reform of immigration, trade, tax, and energy policies in the US. As Trump is expected to fulfill his promise to quickly end the war between Russia and Ukraine, emerging European currencies led the region on Monday. Earlier in the day, President Putin stated that Russia was prepared to negotiate with the US over the war, with Berg saying: "There is growing optimism that with Trump in office, the Russia-Ukraine war could end soon, boosting Eastern European currencies." The steep drop in the dollar on Monday caught some speculative forex traders off guard, highlighting the risks of significant market volatility. The thin liquidity due to the US holiday exacerbated the situation, with the latest data from the US Commodity Futures Trading Commission (CFTC) showing that betting on a stronger dollar has been a favored trade in the market since Trump's election victory, with bets on further dollar strength reaching the highest level since 2019. Simon White, macro strategist at Bloomberg, said: "Compared to previous inaugurations, the dollar has been the most vulnerable asset in the days and weeks following Trump's inauguration. The performance of the dollar has been the least consistent with the average level in the past, with the asset prices showing strong dollar performance during previous elections and inaugurations. Overextended long positions have made the dollar even more vulnerable." FX strategists at Wall Street banks such as Goldman Sachs, TD Securities, and Deutsche Bank expect the dollar to rise further in the coming months, driven by factors such as the America First policy and potential tariff policies. With the rebound sparked by Trump's tariff pledges and signals from the Federal Reserve that it will at least slow down its rate cuts cycle, the dollar index posted its best three-month performance in eight years at the end of 2024. The robust economic growth in the US has also supported the dollar, providing the Fed with the space to cut rates more cautiously, despite the slowdown in external economies forcing local policymakers to maintain more supportive policies. Brad Bechtel, global head of FX at Jefferies, said before Trump's inauguration: "I expect Trump's policies to be pro-dollar, but the implementation may be noisy. This could lead to volatility in the dollar and US bond markets." Jane Foley, head of FX strategy for the G10 countries at Rabobank, said: "Many positive news may already be priced into the dollar's performance, so the knee-jerk reaction is not entirely surprising. This does suggest that if the news flow provides another trigger or two, the dollar may be mature for a more significant pullback."