GDNSK/TOKYO (Reuters) Following Monday's significant risk-off moves triggered by the development of a low-cost Chinese artificial intelligence model, traders had little time to recover as the dollar strengthened versus major currencies on Tuesday due to fresh fears of U.S. tariffs.


Whatever market respite President Donald Trump may have had after taking office last week, short of raising tariffs on U.S. trading partners, has swiftly evaporated.

In an attempt to persuade manufacturers to produce computer chips, pharmaceuticals, and steel domestically, Trump announced on Monday that he would levy taxes on these imports.

That verbal barrage was fired a day after the White House announced that Colombia had agreed to take military planes carrying deported migrants, bringing the United States and Colombia back from the verge of a trade war.

Scott Bessent, Trump's choice for Treasury secretary, has been advocating for uniform taxes on U.S. imports, which would begin at 2.5% and increase monthly, according to a Monday Financial Times story.

Francesco Pesole, ING's foreign exchange analyst, stated, "These remarks go against the markets' cautiously optimistic assumption that tariffs would be more of a case-by-case measure... and not universal."

The dollar has strengthened as a result of a reversal of U.S. rate cut bets due to concerns that tariffs will increase inflation.

The euro dropped to $1.04245, down 0.6%.

The Canadian dollar fell 0.15% to 1.4395 against the US dollar, while sterling ended the day at $1.2443, down 0.46%.


On February 1, Trump threatened to impose tariffs on the EU and China in addition to pointing out potential 25% levies on imports from Canada and Mexico.

The dollar index, which compares the value of the US dollar to six competitors, fell to its lowest point since mid-December at 106.96 the day before before rising 0.1% to 107.91.

According to Sim Moh Siong, a currency analyst at Bank of Singapore, "there has been a lot of whiplash in the dollar movement as a result of... back and forth headlines on the tariffs and whether it is aggressive or not."

REVERSING RISK-OFF MOVES

As concerns about the exorbitant valuation and dominance of U.S. AI bellwethers like Nvidia (NASDAQ:NVDA) were raised by Chinese company DeepSeek's free open-source AI model, traders reversed some of the significant risk-off moves made on Monday due to the focus on tariffs.

"Even if the dollar is not the preferred haven in those equity selloffs, tariffs are a bigger and longer-term concern for the broader FX sphere," Pesole of ING said.

The Japanese currency hit its highest level since mid-December on Monday at 153.715 per dollar due to safe-haven demand, then the yen fell down.

The dollar was up 0.8% against the yen, trading at 155.73 yen.

Additionally, the dollar recovered from a five-week low against the Swiss franc on Monday, rising 0.55% to 0.906.

Following a one-month low in the previous day, the yield on benchmark 10-year Treasury notes recovered in London trading.

Tuesday marks the start of the Federal Reserve's two-day meeting, during which it is anticipated that interest rates will remain unchanged. In the event that inflation eases towards the central bank's 2% annual objective, investors will be watching for any indications that a rate cut may be imminent.


Although money markets don't price in a rate cut until June, they now anticipate the Fed will lower rates by about 48 basis points this year.

With staff at the December meeting projecting minimal additional progress on inflation for the upcoming year, Fed officials have already acknowledged the possible impacts of Trump's trade, immigration, and other initiatives.

This week, the European Central Bank will also meet, and a rate cut is anticipated.