Investing.com - The US dollar slipped lower Monday, on the defensive at the start of a new week that sees Donald Trump return to the White House, with volumes hit by the US holiday.
At 04:10 ET (09:10 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.3% lower to 108.925, but still not far from the more than two-year high seen last week.
Dollar on backfoot
The dollar has started the new week on the backfoot, having gained around 4% since the November US presidential election as traders anticipated Trump’s policies will be inflationary, necessitating higher interest rates for a longer period.
Volumes are likely to thin Monday due to the US markets being closed for the Martin Luther King Jr. Day holiday, and as traders await Trump’s inauguration speech later in the day.
Investors are closely watching as Trump prepares to begin his second term in office after the incoming president indicated he plans to sign a flurry of executive orders on his first day.
“Financial markets are on tenterhooks to see what executive orders newly elected US President Donald Trump will enact on his first day,” said analysts at ING, in a note.
“FX markets are most interested in what he has to say about tariffs and what kind of pain the Oval Office plans to inflict on major trade partners.”
ING added, “after four months of being bought on the rumor, the dollar is now exposed to some selling on the fact – but there should be plenty of dollar buyers.”
Euro bounces from two-year low
In Europe, EUR/USD rose 0.3% to 1.0313, but remained near the two-year low touched last week amid concerns surrounding a trade war, after European Central Bank’s Isabel Schnabel said at the weekend that a trade conflict was “very likely.”
“Perhaps the euro should be worried that the online prediction markets only have low pricing of tariffs on the EU this week,” ING added. “Equally, we doubt FX markets are fully priced to universal tariffs and EUR/USD would get hit were these to emerge.”
German producer prices rose less than expected in December, data showed earlier Monday, climbing by 0.8% on the year, below the 1.1% increase expected.
The European Central Bank has cut interest rates four times since June and is expected to continue doing so in the next six months, having seen inflation in the eurozone fall from double digits in late 2022 to just above its 2% target.
GBP/USD traded 0.1% higher to 1.2193, with sterling down almost 3% over the last month after recent weak economic data pointed to more interest rate cuts in the year ahead.
The Bank of England cut interest rates twice in 2024 , and is widely expected to reduce rates in February, ots next policy-setting meeting.
Yen awaits BoJ meeting
In Asia, USD/JPY dropped 0.1% to 156.19, as markets priced in an interest rate hike at the Bank of Japan’s policy meeting due later this week.
The BoJ is expected to raise interest rates, provided there are no market disruptions following Trump’s inauguration.
USD/CNY traded 0.2% lower to 7.3143, after the People’s Bank of China’s decision to keep its loan prime rates steady, with the one-year loan prime rate unchanged at 3.1% and the five-year rate, used for setting mortgage rates, at 3.60%.
The move, aimed at supporting a weakening yuan, sustaining liquidity, and supporting economic recovery, did little to sway market sentiment for the currency.