Dollar Weakens Ahead of Employment Data; Trump Addresses Tariff Discussions

The US dollar experienced a decline on Monday, giving back some of its recent gains but still remaining near a two-year peak. This shift in value comes as the market anticipates crucial employment figures that will be released later this week, coinciding with the impending inauguration of President Donald Trump.

As of 14:50 ET (19:50 GMT), the Dollar Index, which measures the greenback's strength against a group of six foreign currencies, fell by 0.6% to 108.115, following its rise to a notable two-year high in the previous week.

Dollar Begins the Week on a Diminishing Note

The dollar has kicked off the week on a softer note, with traders waiting anxiously for Friday's job report that is expected to provide insight into the condition of the US economy. Analysts forecast that the report will show an increase of 154,000 jobs for December, with the unemployment rate projected to remain steady at 4.2%.

If these predictions hold, the average monthly job creation for 2024 would tally around 180,000 – a decrease compared to the previous three years, though still suggesting resilient labor market conditions. This expected outcome is not anticipated to impact the Federal Reserve's approach toward interest rates, as the central bank has indicated it plans to implement just two cuts this year, a reduction from its earlier projection of four cuts.

The dollar's position as a safe-haven currency has also been bolstered by the uncertainty surrounding President-elect Trump’s strategies involving import tariffs, tax reductions, and immigration restrictions, set to take effect after his inauguration on January 20.

According to a report from The Washington Post, Trump’s aides are contemplating a tariff regime that would apply to every country, but only target essential imports. However, these claims were disputed by Trump himself on social media, where he asserted that the article was inaccurate and affirmed that his tariff strategy would remain intact.

Analysts from ING suggested that the dollar might lose some upward momentum this week, as the return of more standard market conditions could allow for slight adjustments to lower rates. Nevertheless, with Trump's inauguration approaching and the robust narrative of a hawkish Federal Reserve, any decline in USD may prove to be brief and minor.

Euro Rallies Following PMI Report

In the European market, the euro appreciated by 0.7% to 1.0387, driven by a modest rebound in the eurozone's service industry during December.

The final Purchasing Managers' Index (PMI) for the eurozone, compiled by S&P Global, increased to 49.6 in December compared to November's 48.3. The PMI for the services sector notably improved, moving above the neutral mark to reach 51.6 from November’s 49.5, although a significant drop in manufacturing activity continued to weigh on the overall index.

Last week, the euro fell to its lowest point in over two years against the dollar, primarily due to market expectations of significant interest rate cuts by the European Central Bank (ECB) in 2025, with current projections suggesting at least 100 basis points of easing.

Germany's Consumer Price Index (CPI) rose slightly more than anticipated in December, which is set to be followed by the preliminary inflation data on Tuesday, implying that inflationary pressures in the eurozone remain subdued.

The German CPI index indicated a 0.4% monthly increase in December, up from the previous month’s decline of 0.2% and surpassing initial expectations of a 0.3% gain. The annual figure showed an increase of 2.6%, higher than the 2.4% forecast and the 2.2% noted in November.

Meanwhile, the British pound increased by 0.7% to reach 1.2513, benefiting from the weakening of the dollar after experiencing a 1.4% drop last week.

The Bank of England maintained steady interest rates last month due to rising consumer prices, and traders anticipate approximately 60 basis points of cuts from the Bank in 2025.

Yuan Weakens Amid Economic Concerns

In the Asian markets, the yuan fell by 0.4% to 7.3483, marking its highest level since early 2008. This weakness is attributed to ongoing economic challenges and an increasing yield disparity with the US.

To alleviate fears of further currency depreciation, the People’s Bank of China reiterated its commitment to supporting the yuan on Monday, setting its daily reference rate stronger than the key 7.2 per dollar level.

Recent data released for December failed to bolster the yuan, despite recording its fastest growth in seven months.

The Australian dollar also saw a slight uptick of 0.2% at 157.5, even with data revealing that the country's services sector experienced growth for the second straight month in December, attributed to solid demand and ongoing business expansion.

Conversely, the Canadian dollar slipped by 0.5% to 1.4371, following the announcement that Prime Minister Justin Trudeau intends to resign from his position.

Dollar, Jobs, Tariffs, Trump, Euro