Dollar Jumps to Cement Place as Market’s Favorite Tariff Trade
(Bloomberg) -- The US dollar is once again showing off how it’s become a popular way to trade tariff threats, rallying after President Donald Trump said he favors imposing “much bigger” levies than had been suggested by one of his top officials.
The Bloomberg Dollar Spot Index rose as much as 0.5%, the biggest intraday advance in a week, as Trump vowed tariffs bigger than those reportedly under consideration by incoming Treasury Secretary Scott Bessent. The recent wobble in the stock market tied to Chinese AI startup DeepSeek’s cheaper model is also driving demand for the world’s reserve currency.
“The dollar stays strong until proven otherwise,” said Kathy Jones, chief fixed-income strategist at Charles Schwab & Co. “I do think it has room to come down and probably will at some point, but the tariff threat out there will stay as a bargaining chip, if not an actual thing.”
Trump’s remarks and appetite for safety sparked a bid for the US currency that rippled through Asian and European markets and continued into the close of trading in New York. The Bloomberg dollar gauge ended the session 0.3% higher as of 4 p.m. New York time.
Investors have piled into bullish dollar positions on bets that Trump’s policies would fuel price pressures and keep US interest rates elevated. If tariffs also reduced imports into the US, it would reduce the flow of dollars oversees, which would also likely bolster the currency.
The euro fell as much as 0.7% versus the dollar while the yen lost some 0.7%, leading a retreat among the Group-of-10. The risk-sensitive Australian dollar, seen as particularly exposed to the threat of US tariffs against China, underperformed peers. US Treasuries pared losses after a rally the previous day that had sent yields to the lowest levels this year. The 10-year yield was little changed at 4.54%.
Trump also strongly suggested he could impose specific levies on automobiles from Canada and Mexico — both of which he’s already threatened with 25% across-the-board tariffs as soon as Feb. 1. His remarks follow a brief spat with Colombia during which he threated to use tariffs to force the nation to accept flights of migrants being deported from the US, raising concerns that he will use such levies to strong-arm governments on issues far beyond trade.
“Markets have been relatively sanguine about tariffs given the lack of action,” said Aroop Chatterjee, a strategist at Wells Fargo in New York. “However, although timing still remains uncertain, as we get closer to tariff reality, we expect the the dollar to benefit.”
The dollar rally followed a wild day for global markets after progress on an artificial-intelligence model from Chinese startup DeepSeek wiped $589 billion from Nvidia Corp.’s market capitalization and fueled doubts about whether US companies will come to dominate the new technology.
The news initially pressured the dollar lower on the view that questions about the sustainability of US economic outperformance could tarnish the allure of its assets. But it ended up closing higher on the session as traders questioned the durability of the selling.
“Given long positioning and US stocks near or at all time highs, it is not surprising to see some profit taking,” Leah Traub, a portfolio manager and head of the currency team at Lord Abbett & Co., said of the market movements. “The key will be how long this lasts, as I do think there is still a ‘buy the dip’ mentality in US equities and credit.”
But there are signs of doubt about how much further the dollar can advance. Derivatives traders last week cut bullish bets for only the second time since Trump’s election victory in November, according to a Bloomberg analysis of data from the Commodity Futures Trading Commission for the week ended Jan. 21.
Still, selling the US currency has proven to be a painful trade in recent months. The greenback — which typically gains from tariff expectations — advanced more than 7% during the last quarter of 2024 and is up some 4% since the US election.
“Some investors may have been overly optimistic about the dollar’s continued dominance under his presidency,” said Shoki Omori, chief global desk strategist at Mizuho Securities in Tokyo. “This is a set up for potential big spikes in volatility, given positions have been heavily skewed towards a stronger dollar, and little of the opposite.”
--With assistance from Michael G. Wilson, Anya Andrianova, Alice Atkins and Kristine Aquino.
(Updates levels to reflect BBDXY close.)