Dollar Declines with Tariff Consideration

CURRENCY FUTURES

The U.S. dollar index declined after U.S. President Donald Trump stated he was considering 25% tariffs on Canada and Mexico as early as Feb. 1.

A partial recovery in the greenback is likely in the afternoon trade.

Despite lower prices today, the long term fundamentals and technicals remain supportive to the U.S. dollar.

The ZEW Indicator of Economic Sentiment for Germany fell to 10.3 in January 2025 from 15.7 in December, which was well below forecasts of 15.3.

The long term fundamentals and technicals remain bearish for the euro currency and the British pound, and lower prices are likely.

The Japanese yen strengthened following last week’s hawkish comments from Bank of Japan Governor Kazuo Ueda. Last Wednesday, Ueda stated that the Bank of Japan would discuss the possibility of raising interest rates at its upcoming policy meeting.

STOCK INDEX FUTURES

President Donald Trump took steps to advance his agenda on his first day in office yesterday but refrained from immediately imposing tariffs, as many had anticipated.

Stock index futures are higher even as President Trump pledged to impose tariffs up to 25% on Canadian and Mexican imports as soon as February 1.

Much of last week’s strength can be attributed to on-balance softer than expected producer and consumer price index reports, which gives latitude to the Federal Open Market Committee to be more accommodative.

There are no major economic reports scheduled for today.

INTEREST RATE MARKET FUTURES

Futures are steady at the front of the yield curve, and are higher at the long end of the curve.

Signs of cooling U.S. inflation have increased expectations for a more dovish Fed policy, although there is a 99% probability that the Federal Open Market Committee will keep its fed funds rate unchanged at 4.25% – 4.50% at its January 29, 2025 policy meeting, and there is a 1% chance of a 25 basis point reduction.

Financial futures markets suggest the FOMC will lower its fed funds rate by 25 basis points at is June 18, 2025 policy meeting.

The U.S. economy is likely to perform well, which may cause the FOMC to be slower to add accommodation in 2025 than the consensus view.

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