Dollar Retreats Ahead of Employment Data; Trump Denies Tariffs Report

The US dollar experienced a decline on Monday, giving back some of its recent gains, yet it remained near a two-year peak just ahead of the important employment data set to be released later in the week and as President Donald Trump's inauguration approaches.

As of 14:50 ET (19:50 GMT), the Dollar Index, which measures the greenback against a basket of six other currencies, was down by 0.6% at 108.115, pulling back after reaching a high that hasn’t been seen in over two years last week.

Dollar Starts the Week on a Low Note

The dollar has begun the week on a weaker note as traders prepare for the anticipated employment report coming this Friday, which is expected to offer insights into the state of the world’s largest economy.

Analysts forecast that the report will indicate that approximately 154,000 jobs were added in December, while the unemployment rate is expected to remain steady at 4.2%.

If this prediction holds true, it would bring the average monthly job growth for 2024 to around 180,000. This marks a slowdown compared to the previous three years but still reflects a solid labor market.

It is unlikely that this report will significantly change the Federal Reserve's policy on interest rates, as the central bank has indicated that only two rate cuts are expected this year, a decrease from an earlier forecast of four cuts.

Additionally, the dollar is receiving a boost as a safe-haven currency amid uncertainties surrounding President-elect Donald Trump's plans, which include substantial import tariffs, tax reductions, and immigration controls as he takes office on January 20.

The Washington Post reported on Monday that Trump's aides are considering introducing tariffs on imports from all countries, although only critical imports would be affected.

However, Trump refuted this report via social media, asserting that the article was inaccurate and reaffirming his commitment to his tariff strategy.

Analysts at ING noted, "The dollar could lose some momentum this week as a return to normal market conditions fosters some adjustments in response to slightly lower rates. Yet, with the inauguration of Trump close at hand and the prevailing hawkish stance of the Fed, any correction in the dollar may be brief."

European Currency Gains from PMI Data

In Europe, the euro rose by 0.7% to 1.0387, aided by a modest recovery in the eurozone's services sector in December.

The final purchasing managers' index (PMI) for the eurozone, compiled by S&P Global, increased to 49.6 for December, up from 48.3 in November.

The headline index benefitted from a recovery in the services sector, which surpassed the breakeven point by bouncing back to 51.6 from November's 49.5, although it faced pressure from a sharper decline in manufacturing activity.

Last week, the euro reached its lowest level against the dollar in over two years, as traders anticipated further interest rate cuts from the European Central Bank in 2025, with the market estimating at least 100 basis points of easing.

Germany's consumer price index (CPI) showed a monthly increase of 0.4% in December, a notable rise from the previous month, and exceeding expectations of a 0.3% gain. The annual CPI also increased to 2.6%, surpassing the anticipated 2.4% and the prior month's 2.2% growth.

The British pound increased by 0.7%, trading at 1.2513, benefiting from the dollar's decline after experiencing a drop of about 1.4% last week.

The Bank of England had kept interest rates steady in the previous month with inflation exceeding targets, and traders are forecasting around 60 basis points of cuts from the Bank of England in 2025.

Chinese Yuan Weakness Continues

In Asia, the Chinese yuan fell by 0.4% to 7.3483, reaching its highest value since early 2008, driven by economic challenges and a growing yield gap with the US.

To mitigate concerns about further depreciation, the People’s Bank of China confirmed its commitment to support the yuan by setting its daily reference rate stronger than the critical level of 7.2 per dollar.

Recent data released on Monday, despite its fastest growth in seven months, failed to bolster the yuan.

Meanwhile, the Japanese yen was slightly up at 157.5, even with data showing continuous growth in the country's services sector in December, led by strong demand and expanding businesses.

Elsewhere, the Canadian dollar dipped by 0.5% to 1.4371 after Canadian Prime Minister Justin Trudeau announced plans to resign from his position.

Dollar, Economy, Trump