Dollar on track for worst week since November 2023

By Karen Brettell

NEW YORK (Reuters) - The dollar fell on Friday and was on track for its worst week in more than a year on expectations that tariffs enacted by U.S. President Donald Trump will be lower than previously feared and unlikely to spur an international trade war.

The prospect of high tariffs on goods from countries including China, Canada, Mexico and the euro zone has raised concerns about a renewed bout of inflation, which has helped to send Treasury yields and the U.S. dollar higher in recent months.

But that move partially reversed this week as traders bet that tariffs may not be as large or as widespread as previously feared. Trump said on Thursday that his conversation with Chinese President Xi Jinping last week was friendly and he thought he could reach a trade deal with China.

“People are less and less convinced that the tariffs are coming,” said Adam Button, chief currency analyst at ForexLive in Toronto.

The dollar index was last down 0.64% at 107.45. It reached 110.17 on Jan. 13, the highest since November 2022. It is on track to lose 1.79% this week, the biggest weekly fall since November 2023.

The Chinese yuan also got a lift on the back of Trump's remarks, with the onshore unit rising to its strongest level in eight weeks at 7.2363 per dollar.

Trump also said on Thursday that he wants the Federal Reserve to cut interest rates, before the U.S. central bank is due to meet next week.

The Fed is expected to keep rates unchanged when it concludes its two-day meeting on Wednesday, though investors will be watching for any clues that a rate cut could come in March if inflation continues to ease closer to the U.S. central bank’s 2% annual target.

Data on Friday showed that U.S. business activity slowed to a ninth-month low in January amid rising price pressures, while separately U.S. existing home sales increased to a 10-month high in December.

U.S. consumer sentiment also weakened in January for the first time in six months amid worries about the labor market and potential higher prices for goods if Trump's new administration presses ahead with planned tariffs on imports.

Some of the retrace in the greenback this week was likely due to technical reasons, after its 10% rise since the end of September, said Marc Chandler, chief market strategist at Bannockburn Global Forex in New York.

"A lot of good news for the U.S. is priced in," Chandler said. A test for dollar strength may come next week if the Fed holds rates steady and the European Central Bank, Bank of Canada and Swedish Riksbank all cut rates, he added.

The euro rose 0.76% to $1.0494. It is on pace for a 2.18% weekly gain, its best week since July 2023.

The single currency was boosted by a survey showing that euro zone business began the new year with a modest return to growth as stable services activity in January was complemented by an easing of the long-running downturn in manufacturing.

The yen was up slightly in choppy trading after the Bank of Japan raised interest rates on Friday to their highest since the 2008 global financial crisis and revised up its inflation forecasts.

BOJ Governor Kazuo Ueda said the central bank will keep raising interest rates as wage and price increases broaden but offered few clues on the timing and pace of future rate hikes.

The dollar was last down 0.11% on the day at 155.88 yen.

Sterling advanced 1.04% to $1.2479 and was poised for a rise of 2.58% for the week, following three straight weeks of losses.

In cryptocurrencies, bitcoin gained 2.94% to $106,159.29.

Trump on Thursday ordered the creation of a cryptocurrency working group tasked with proposing new digital asset regulations and exploring the creation of a national cryptocurrency stockpile, making good on his promise to quickly overhaul U.S. crypto policy.

(Reporting by Karen Brettell in New York; Additional reporting by Rae Wee in Singapore and Greta Rosen Fondahn in Gdansk; Editing by Toby Chopra and Diane Craft)