The U.S. dollar extended its rally on Tuesday, climbing sharply after President-elect Donald Trump pledged to impose steep tariffs on China, Mexico, and Canada shortly after taking office. His remarks dashed hopes that his Treasury Secretary nominee, Scott Bessent, might temper these aggressive trade policies, reigniting concerns over escalating global trade tensions.
Dollar Strengthens Amid Trade Uncertainty
The greenback maintained its upward trajectory, bolstered by its safe-haven appeal as market participants brace for the economic fallout of potential tariff hikes. Investors are pricing in continued demand for the dollar as geopolitical and trade risks rise.
However, the Federal Reserve’s December meeting remains a focal point for traders. While the market is largely expecting a 25 basis-point rate cut, mixed signals from Fed officials and strong economic performance could temper the dollar’s rally.
Australian Dollar Under Pressure
The Australian dollar (AUD) plunged below $0.65, under significant selling pressure due to heightened U.S.-China trade tensions. Trump’s threats of additional tariffs on Chinese goods weighed heavily on the risk-sensitive currency, which is closely tied to Chinese economic performance.
Domestically, the Australian market awaits crucial inflation data this week, expected to shed light on the Reserve Bank of Australia’s (RBA) policy direction. The RBA has reiterated its restrictive stance until inflation shows sustainable progress towards its target but remains open to adjusting policies based on incoming data.
Japanese Yen Gains Ground
The Japanese yen (JPY) firmed to 154 per dollar, gaining about 0.5% this week, as heightened geopolitical risks and trade uncertainty boosted demand for safe-haven assets. Trump’s nomination of Scott Bessent as Treasury Secretary added an element of stability, prompting traders to unwind speculative “Trump trades.”
Bank of Japan Governor Kazuo Ueda hinted at the possibility of an interest rate hike as early as December, citing concerns about the yen’s recent depreciation. Domestically, investors are focusing on Tokyo’s upcoming inflation data, considered a leading indicator for national price trends.
Market Outlook
While the dollar is poised to remain strong into year-end, its performance could face headwinds from:
- Fed rate decisions: A December rate cut could weigh on the dollar, though geopolitical uncertainty may offset this effect.
- Geopolitical risks: Escalating tariff threats and global trade tensions could continue to fuel safe-haven demand for the greenback.
- Seasonal trends: Historically, the dollar tends to weaken toward the end of the year due to seasonal positioning adjustments. Key Takeaways for Traders
- USD/JPY: Watch for a potential break above key levels if geopolitical risks escalate.
- AUD/USD: Inflation data will be pivotal in determining the Aussie dollar’s direction amid ongoing trade tensions.
- Safe-haven dynamics: Both the yen and dollar are expected to remain resilient as markets navigate heightened uncertainties.
Traders should remain cautious and prepared for heightened volatility as policy announcements and economic data continue to shape market sentiment.
