US dollar has best week since February on tariff inflation risks

[NEW YORK] The US dollar turned in its best weekly performance in more than four months as US President Donald Trump’s latest tariff threats heightened concern that escalating trade tensions will stoke inflation and derail a rally in risk markets.

The Bloomberg Dollar Spot Index rose 0.7 per cent this week, the best showing – by a hair – since the week of Feb 28, after falling for two weeks before that. The yen and pound sterling were among the worst performers in the Group of 10 this week. 

Traders had grown increasingly bearish on the greenback in the last several months as concerns over deficits and fiscal spending curbed the appeal of the US currency.

Now, as Trump unveils new tariff plans following a three-month pause – including a 35 per cent levy on some Canadian imports and blanket tariffs of up to 20 per cent on most trading partners – investors are focusing on the potential risks from the fallout, including inflation. 

“The market setup is too sanguine on trade policy risks with short dollar and long risk positions,” said Aroop Chatterjee, a strategist at Wells Fargo. He also said that the market shows “too much optimism that the Fed will be rising to the rescue with inflation uncertainty working against that narrative”.

JPMorgan strategists led by Meera Chandan said they see that some indicators have turned less bearish on the dollar, “which could signal consolidation in the near term, but we consider these less relevant over the medium term”. They expect the greenback to weaken further based on tariffs and policy uncertainty, while they are bullish on the euro, yen and Swiss franc.

Meanwhile, speculative traders slightly increased their bearish dollar views according to the latest data, while remaining close to the most negative on the greenback since August 2023.

A group of non-commercial traders, including asset managers and other speculators, raised their bets against the dollar in the week through Jul 8, according to the Commodity Futures Trading Commission’s report. They now hold some US$18.6 billion worth of positions tied to the dollar weakening, up from about US$18.3 billion in a week prior. BLOOMBERG