Dollar Loses Ground Ahead of Key Jobs Data; Trump Responds to Tariffs Report

The US dollar saw a decline on Monday, retreating from some of its recent strength while still maintaining a position close to a two-year peak. This shift comes as traders prepare for the important employment data scheduled to be released later in the week, coinciding with the upcoming inauguration of President Donald Trump.

At 14:50 ET (19:50 GMT), the Dollar Index, which measures the currency against a basket of six major currencies, fell by 0.6%, trading at 108.115. This drop follows its rise to a peak not seen in over two years last week.

Dollar Begins the Week Weak

The greenback kicked off the week on a weak note as traders anticipate the crucial job report set to be unveiled on Friday. This report is expected to provide insights into the health of the US economy.

Analysts predict that the report will indicate an increase of 154,000 jobs in December, keeping the unemployment rate stable at 4.2%. Such figures would suggest an average monthly job gain of about 180,000 for 2024—a slowdown compared to the past few years, yet still reflecting robust labor market conditions.

This anticipated data is unlikely to sway the Federal Reserve’s approach to interest rates, as the central bank has indicated that it may implement only two rate cuts this year, a revision from previous predictions of four reductions.

Adding to the dollar's safe-haven appeal is the uncertainty surrounding President-elect Trump’s intentions regarding significant import tariffs, tax reforms, and immigration policies following his inauguration on January 20.

The Washington Post reported on Monday that aides within Trump’s team are considering plans for tariffs that would be imposed on all countries, but would only apply to essential imports. However, Trump took to social media to contest this report, arguing that it inaccurately portrayed his stance on tariffs and asserting that his trade policy would remain intact.

“The dollar may experience some decrease in momentum this week as market conditions normalize, likely leading to minor corrections due to slightly lower rates. However, the impending inauguration of Trump and the prevailing hawkish sentiment from the Federal Reserve might limit any substantial long-term corrections for the USD,” wrote analysts at ING in their report.

Euro Recovers After PMI Data Release

In European markets, the euro appreciated by 0.7%, reaching 1.0387. This increase followed a modest rebound in the eurozone services sector during December.

The final Purchasing Managers' Index (PMI) for the eurozone, compiled by HCOB and S&P Global, climbed to 49.6 in December from 48.3 in November.

This headline PMI was bolstered by the services sector, which saw an improvement, bouncing back to 51.6 from November’s 49.5. However, overall economic performance was hindered by a sharper contraction in factory activity.

Last week, the euro had fallen to its lowest level against the dollar in more than two years. Traders are currently anticipating more interest rate cuts from the European Central Bank throughout 2025, with markets projecting at least a 100 basis point easing.

Meanwhile, inflation indicators in Germany showed slightly more than expected increases in December, aligning with Tuesday's anticipated data release, suggesting that inflationary pressures remain mild across the eurozone.

The German Consumer Price Index (CPI) experienced a monthly increase of 0.4% in December, marking a significant rise from a 0.2% decrease in the prior month and exceeding the expected 0.3% gain. Additionally, the annual inflation rate rose to 2.6%, surpassing both the anticipated 2.4% and the 2.2% reported in November.

In another development, the British pound saw a modest increase of 0.7%, reaching 1.2513 due to the dollar's weakness, having fallen by about 1.4% last week. The Bank of England maintains its interest rate policy following consumer prices exceeding targets, with market participants anticipating around 60 basis points of cuts by the bank in 2025.

Chinese Yuan Weakens

In the Asian market, the Chinese yuan depreciated by 0.4%, trading at 7.3483 against the dollar. The yuan's decline is attributed to ongoing economic difficulties and a growing yield gap compared to the US.

To reassure markets and stem fears of further depreciation, the People’s Bank of China has reaffirmed its commitment to support the yuan, setting the daily reference rate stronger than the crucial level of 7.2 per dollar on Monday.

Data released for December did not bolster the yuan’s performance, despite the report indicating it had its fastest growth in seven months.

The Japanese yen increased slightly, up 0.2% to 157.5, even with data showing the country’s services sector expanding for the second consecutive month in December, driven by robust demand and ongoing business growth.

Elsewhere, the Canadian dollar fell by 0.5% to 1.4371 following Prime Minister Justin Trudeau's announcement of his intention to step down from office.

Dollar, Jobs, Tariffs