USD: Dollar softens ahead of CPI, tariffs remain in focus

The US Dollar (USD) fell against the euro on Tuesday but was still hovering near its highest level in more than two years as the first of two inflation readings this week provided little assurance the U.S. Federal Reserve will soon cut interest rates.

Cooler-than-expected producer prices in December followed last week’s strong jobs report that led investors to scale back bets on rate cuts as potential U.S. tariffs remained in the spotlight.

Investors have been closely watching the economic data to see if it supports the Fed’s cautious stance on rates, with the consumer prices (CPI) report due on Wednesday.

“We’ve already gotten the first inflation print in PPI this morning, and so far, markets are underwhelmed by the undershoot,” said Helen Given, associate director of trading at Monex USA, in Washington DC.

“Though it’s without a doubt a better reading than most traders were expecting, the dollar is now returning to just about where it opened the session.”

Traders are now pricing the first rate cut in September, but less than the 50 basis points the Fed projected in December.

With President-elect Donald Trump set to step back into the White House next week, the focus has been on his policies that analysts expect will boost growth and price pressures.

The threat of tariffs along with fewer Fed rate cuts priced in has lifted Treasury yields and supported the greenback.

However, on Tuesday the market focus returned to the chance that U.S. tariffs may be raised gradually, after a new media report suggesting the U.S. could take a measured approach.

Trump’s Treasury pick Scott Bessent is expected to keep a leash on U.S. deficits and to use tariffs as a negotiating tool, mitigating the expected inflationary impact of the U.S. economic policy.

Brad Bechtel, global head of FX, at Jefferies, said the economic data tells only one part of the story, with Trump’s policies making up a bigger part of it.

“I doubt the market really reprices naturally on just one CPI report tomorrow,” he said. “It’s going to be all eyes on Trump and the new administration. Obviously, the CPI report is important, but one data point is not going to change things.”

The dollar index, which measures the U.S. currency versus six other units, slipped 0.04% to 109.37, shy of the 26-month high of 110.17 it reached on Monday. It hit 114.78 in October 2022, its highest since 2002.

Meanwhile, the euro was up 0.39% at $1.0286. It touched $1.0177 on Monday, its lowest level since November 2022.

The single currency dropped more than 6% in 2024 as investors fretted about tariff threats and the monetary policy divergence between the Fed and the European Central Bank.

The British pound, down 0.07% at $1.2194 against the dollar, also touched a 2-1/2-month low versus the euro as concerns about Britain’s fiscal challenges continued to weigh.

The dollar rose 0.37% against the yen to 158.055, with traders bracing for next week’s Bank of Japan policy meeting where markets are pricing in 57% chance of a hike.

Some analysts flagged that the most important forex market battleground right now is the dollar/yuan – where the People’s Bank of China (PBOC) is still managing to hold the line even as depreciation pressure intensifies.

The PBOC has unveiled a flurry of measures in recent days to support its weak currency.

The yuan was flat, changing hands at 7.3468 per dollar on Tuesday.