US Dollar Drops on Report of Trump Tariff Plan Shift

The US dollar has had a volatile start to the week, sparked by a report that President-elect Donald Trump's tariff plan may shift. 

The US dollar index fell 0.8% to 108.1 on Monday, then pared losses after Trump denied a Washington Post report. The newspaper reported that Trump may scale back his plans for widespread tariffs when he returns to the White House on January 20.

US Dollar Index, Monday, January 6 Session, Source: Trading Economics

Citing people familiar with the matter, the newspaper reported that Trump's aides are exploring tariff plans that would be applied to every country but only cover critical imports. This would mark a significant shift from his presidential campaign plans.

Trump, though, denied the newspaper's reporting on Truth Social. 

"The story in the Washington Post, quoting so-called anonymous sources, which don’t exist, incorrectly states that my tariff policy will be pared back," he wrote on his social media platform. "The Washington Post knows it’s wrong. It’s just another example of Fake News."  

US Dollar Reacts to Trump Tariff Plans

The reporting fueled uncertainty about one of Trump's key policy proposals. In response, the dollar declined sharply against most major currencies.

The Bloomberg Dollar Spot Index (BBDXY), which measures the value of the US dollar relative to other major global currencies, ended the session 0.6% lower on Monday. After the publication of the Washington Post article, the index lost 1%, marking the largest intraday drop since 2023. 

Meanwhile, the euro gained 1.3% the same day against the US dollar (EUR/USD), the common currency's largest intraday gain in 14 months. The British pound (GBP/USD rose as much as 1%.

US Dollar Index vs. EURUSD vs. GBPUSD, Monday, January 6 Session, Source: Trading Economics

The initial loss in the dollar was "an outsized reaction to an unverified report, but it does show the direction of travel,"Kathleen Brooks, the director of research at XTB, told Bloomberg. "We've had a large buildup of dollar longs and they are at risk of a turnaround."

Trump Tariff Plans Go Back to 2024

During his 2024 presidential campaign, Trump vowed to impose 10-20% tariffs on all imported goods, with tariffs as high as 60% on Chinese products. After his election win in November, he threatened to impose additional tariffs of 10% on Chinese goods and 25% on all imports from Mexico and Canada.

With Trump's aim to raise US revenues, he will likely go ahead with some of his tariff plans. He may threaten to use them until he gains the upper hand in trade negotiations.

"Members of Congress are getting to work on one powerful Bill that will bring our Country back," Trump said. "It will all be made up with tariffs, and much more, from countries that have taken advantage of the US."  

A Bloomberg Economics study suggests that higher tariffs could lead to increased inflation and a decline in US GDP. By 2028, US GDP could shrink by 0.8% if only China retaliates. If other countries impose tariffs, US economic growth could slow to 1.3%. 

Trump’s tariff could hurt global economic growth and drive up consumer prices, particularly if other governments retaliate.

Trump's Tariff Increases to Impact Poorest Americans, Source: ITEP

Trump Tariff Plans Target Critical Sectors

The dollar had strengthened amid expectations that Trump will impose tariffs on the US’s major trading partners. This put pressure on other currencies. 

However, the dollar could weaken from a tariff program focused solely on sectors deemed critical to national or economic security. This would have a lesser effect on the global economy and US inflation than a broader tariff approach.

According to The Washington Post, it remains unclear which imports or industries might be targeted by tariffs. However, preliminary discussions have centered on sectors considered vital to national or economic security. 

These could include the defense industrial supply chain, critical medical supplies, and energy production.

Critical Sector Tariffs Forecast to Weigh on Dollar, Source: Corpay

The uncertainty of Trump tariffs and whether his administration will target Europe's auto sector led to a near 3% surge in the Euro Stoxx Automobiles & Parts index. Europe’s STOXX 600 closed 0.9% higher alongside France’s CAC 40, up 2.2%, and Germany’s DAX up 1.5%.

Some of Europe's major luxury brands also gained from the optimism of more selective tariffs. LVMH LVMUY, Hermes HESAY, and Kering PPRUY all rose over 2%.

European markets overall closed higher on January 6, driven by investor optimism that US tariffs might be less severe than initially feared. However, speculation surrounding the incoming administration’s agenda will likely be accompanied by heightened market volatility.

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