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The dollar fell on Monday as investors, worried about the latest tariff threat from US President Donald Trump against Europe over Greenland, rushed to buy the Japanese yen and the Swiss franc in a broad risk aversion across markets.
Over the weekend, Trump said he would impose additional tariffs of 10% on imports from Denmark, Norway, Sweden, France, Germany, the Netherlands, Finland, and the UK, effective February 1, until the US is allowed to purchase Greenland.
EU ambassadors agreed on Sunday to intensify their efforts to dissuade Trump from imposing the tariffs, while simultaneously preparing for retaliatory measures should he proceed, according to EU diplomats.
After a brief dip in overnight trading, European currencies, including the euro, sterling, and the Nordic currencies, rebounded. The Swiss franc, a traditional safe haven, was on track for its biggest daily gain against the dollar in a month.
Euro benefits from dollar aversion
The euro reversed course from the start of Asian trading to rise 0.2% to $1.1627 by mid-morning European trading, while sterling similarly recovered, gaining 0.1% to $1.339.
"Tariff threats are typically expected to weaken the euro," said Khun Goh, head of Asia research at ANZ Bank.
"But as we saw last year as well, when the so-called 'Liberation Day' tariffs were implemented, the effect in the foreign exchange markets actually tended to be weaker on the dollar every time political uncertainty emanating from the US increased."
Investors had abandoned the dollar after Trump unveiled sweeping tariffs on the world last April, triggering a crisis of confidence in US assets.
Although some capital outflows from the dollar emerged on Monday, notably significant gains for the Swiss franc as a safe haven, analysts said that if tensions escalate further, investors are likely to return to the US currency.
“It’s understandable that the market is concerned about the dollar’s ​​decline since last April,” said Jane Foley, senior currency strategist at Rabobank. “But I would strongly caution against assuming that the dollar’s ​​safe-haven status is over.”
She added, “Even if investors outside the US decide to withdraw their funds, where will they go? Other markets are not large enough to absorb it. The sheer size of the US market means there is always safe-haven value associated with US assets.”
The yen remains in intervention territory.
The dollar fell 0.5% against the Swiss franc to 0.7982 francs, while it edged lower against the Japanese yen, another safe-haven currency outside the United States, to 158.055 yen.
Domestic politics in Japan have weighed on the yen in recent weeks, with a snap election raising expectations of further fiscal stimulus. With the yen trading near its weakest levels since mid-2014, the risk of official intervention is increasing, especially given the verbal warnings from Tokyo over the past two weeks.
"We remain skeptical that intervention will be successful on a sustained basis, and we will also need fundamental factors to support the yen," said Derek Halpenny, head of global markets research for Europe, the Middle East, and Africa at MUFG, in a note. "Moves in the yen today are certainly more limited."
Cryptocurrencies, often seen as a barometer of investor risk appetite, declined, with Bitcoin falling nearly 3% to $92,740 and Ether dropping more than 4% to $3,205.
Data released on Monday showed that the Chinese economy grew by 5.0% last year, meeting the government's target, capturing a record share of global demand for goods to offset weak domestic consumption.
The yuan rose in the onshore market to its highest level in 32 months, reaching 6.9630 against the dollar, shrugging off the mixed data, after the People's Bank of China set its strongest daily fixing rate for the currency in more than two years.
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