The U.S. dollar faced a turbulent session Monday, dropping sharply against major currencies before paring losses after President-elect Donald Trump denied reports suggesting his administration might pursue a scaled-back tariff strategy. The dollar index, which measures the greenback's performance against six major currencies, fell 0.59% to 108.32, retreating from earlier losses of more than 1%. The session highlighted the market's sensitivity to Trump's economic policies and rhetoric as he prepares to assume office.
Earlier in the day, The Washington Post reported that Trump's team was considering a narrower tariff plan targeting specific sectors deemed critical to national security and economic stability. This was seen as a departure from his campaign promise of broader tariffs, prompting an initial wave of optimism in global markets. However, Trump swiftly rejected the report on his Truth Social platform, calling it "just another example of Fake News."
The conflicting narratives left investors grappling with uncertainty. "Trump's Truth Social views are going to drive FX volatility for a while," said Karl Schamotta, chief market strategist at Corpay. He added that market participants remain cautious, balancing optimism about a potentially less aggressive tariff approach with concerns over broader economic risks.
The dollar's earlier decline bolstered gains in other currencies. The euro climbed 0.68% to $1.0379, marking its largest daily percentage gain in a month, as German inflation data exceeded expectations. The Chinese yuan strengthened 0.26% to 7.341 per dollar, reversing some of last week's losses when the dollar hit a 26-month high against the yuan. The pound rose 0.64% to $1.2499, supported by improved market sentiment in Europe.
Global equity markets also rallied, with Wall Street leading the charge. The Dow Jones Industrial Average advanced 0.58% to 42,981.89, while the S&P 500 and Nasdaq Composite rose 1.13% and 1.76%, respectively. Gains were driven by technology and consumer discretionary stocks, sectors seen as particularly sensitive to trade developments. European markets followed suit, with the pan-European stock index climbing 0.78%.
Federal Reserve policy also played a role in Monday's market movements. Fed Governor Lisa Cook indicated that the central bank could afford to exercise caution in further rate cuts, citing a strong economy and inflation that remains stubbornly high. Her comments contributed to the dollar's partial recovery later in the day, though broader uncertainties kept pressure on the currency.
The tariff debate continues to cloud the economic outlook as Trump's inauguration approaches. Investors remain wary of potential disruptions to global trade, particularly amid ongoing concerns about strained U.S.-China relations. The Chinese yuan, a key barometer of trade sentiment, has faced significant pressure in recent weeks, reflecting its vulnerability to Trump's tariff rhetoric.
The political landscape in Canada added another layer of intrigue to Monday's market dynamics. The Canadian dollar strengthened 0.65% to 1.43 per U.S. dollar following reports that Canadian Prime Minister Justin Trudeau is expected to announce his resignation. The move underscores the broader geopolitical shifts influencing financial markets as governments prepare for potential policy changes under Trump's leadership.