US dollar declines, the US dollar experienced a slight decline as market participants expressed optimism regarding the potential for gradual tariff implementations.

The US dollar is under pressure as risk sentiment received a much-needed boost following reports that incoming President Donald Trump’s economic team is considering a gradual approach to raising tariffs on US imports. According to Bloomberg, tariff increases may be implemented in stages, with hikes ranging from 2% to 5% per month, rather than applying a sudden increase. This strategy aims to mitigate the inflationary impact typically associated with such measures.
 

Impact on Treasury Yields and Currency

The 10-year Treasury yield, which had recently surpassed 4.80% for the first time in 14 months, fell to around 4.75% after the reports of the gradual tariff hikes. Consequently, the US dollar pulled back from its more than two-year highs against a basket of currencies, with its index declining by 0.5%.

This shift in market sentiment provided a sense of relief for investors grappling with ongoing concerns about persistent inflation in the United States. Expectations for interest rate cuts have been significantly reduced in recent weeks, especially following Friday's robust jobs report, which further solidified a positive economic outlook.
 

Rate Cut Expectations

Currently, the market is fully pricing in only one 25-basis-point rate cut. Although the recent tariff news has prompted investors to adjust their expectations slightly, anticipating a few additional basis points of cuts for 2025, there's still potential for a significant reversal in these trends. This highlights the downside risks to the dollar, especially if Trump, who is set to take office soon, continues to soften his previously aggressive policies.
 

Market Reactions to Economic Data

In the immediate term, investors are closely monitoring today’s Producer Price Index (PPI) for December, which precedes tomorrow’s Consumer Price Index (CPI) data for the same month. Additionally, Federal Reserve policymakers are expected to make headlines, with speeches scheduled from the New York Fed’s John Williams and Kansas City’s Esther George later in the day.
 

Stock Market Performance

On Wall Street, a combination of dip buying and a rotation out of technology stocks helped push the Dow Jones Industrial Average up by 0.9% on Monday, while the broader S&P 500 also recorded modest gains. However, the Nasdaq 100 continued its decline, nearing two-month lows.

In one of its final actions, the Biden administration announced new restrictions on US exports of AI chips, negatively impacting tech stocks. These measures won’t take effect until after Trump assumes office, leaving room for potential adjustments or cancellations.

As the Q4 earnings reporting season kicks off this week, particularly with bank earnings on the horizon, investor sentiment could shift if positive results for major tech firms emerge, particularly the so-called "Magnificent 7."
 

Global Sentiment and Commodity Currencies

Equities across the globe are rebounding today, buoyed by easing bond yields in Europe. Chinese stocks, in particular, are outperforming after both the People's Bank of China and the country's securities regulator pledged additional support to stabilize the yuan and the stock market.

Optimism from China
The prospect of a gradual approach to US tariffs, coupled with speculation that Chinese-owned TikTok might sell its US operations to Elon Musk, has added to the overall optimism in the markets.

Currency Movements
In bond markets, Japanese yields bucked the trend, spiking higher as investors increased their bets that the Bank of Japan would raise interest rates during its upcoming meeting. This follows hawkish remarks from Deputy Governor Himino earlier today.

Despite the brighter market mood, the Japanese yen weakened against its major peers. The British pound also struggled to recover, as concerns over UK borrowing continued to weigh on its performance.

Conversely, the Australian and New Zealand dollars, both commodity-linked currencies, rose for a second consecutive day against the US dollar, largely driven by improved sentiment regarding China.
 

Conclusion

In summary, the sentiment in the financial markets has improved due to reports of gradual tariff hikes and positive developments in China. The US dollar's recent dip reflects this shift, along with ongoing anticipation of crucial economic data that will shape future monetary policy. As traders keep a close eye on inflation reports and Fed remarks, the outlook for various currencies and equities will continue to evolve, influenced by both domestic and global factors.

When considering shares, indices, forex (foreign exchange) and commodities for trading and price predictions, remember that trading CFDs involves a significant degree of risk and could result in capital loss. 

Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.