Dollar on track for worst week since Nov 2023 amid Trump policy fears

The dollar fell on Friday and was on track for its worst week in more than a year on expectations that tariffs enacted by US 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 have raised concerns about a renewed bout of inflation, which has helped to send Treasury yields and the US 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 0.67 per cent on the day at 107.42. It reached 110.17 on Jan. 13, the highest since November 2022. It is on track to lose 1.83 per cent 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 US 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 US central bank's 2 per cent annual target.

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

The euro rose 0.83 per cent to $1.0501. It is on pace for a 2.25 per cent 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 0.08 per cent on the day at 155.92 yen.

Sterling advanced 0.89 per cent to $1.2462 and was poised for a rise of 2.44 per cent for the week, following three straight weeks of losses.

In cryptocurrencies, bitcoin gained 2.48 per cent to $105,678.69.

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 US 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)