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Global currency markets opened the week in turmoil following President Trump’s renewed tariff threats over Greenland, while conflicting inflation data from Canada and intervention warnings from Japan added layers of complexity to an already volatile trading environment.
Trump’s Tariff Gambit Rattles Dollar Strength
The US dollar’s recent rally came to an abrupt halt after Trump threatened to impose 10% tariffs on major European economies including the UK, France, and Germany starting February 1st unless the US is permitted to purchase Greenland. The tariffs would escalate to 25% by June without a deal. This escalation follows the familiar pattern from Trump’s previous trade conflicts, where growth concerns trigger stock market selloffs and lower Treasury yields on expectations of economic weakness. The resulting environment typically weighs on the greenback through expectations of earlier or larger Federal Reserve rate cuts.
Market positioning had recently turned more hawkish on the dollar, making this reversal particularly pronounced. The EUR/USD pair benefited from the shift, with the Federal Reserve having significantly more room to cut rates compared to the European Central Bank, which has already reached neutral levels with inflation at target.
Canada’s Inflation Surprise Complicates Bank of Canada Path
North of the border, Canadian inflation data delivered an unexpected twist that could reshape monetary policy expectations. December’s Consumer Price Index accelerated to 2.4% year-over-year, surpassing the 2.2% consensus forecast and the prior month’s reading. However, the acceleration stemmed largely from technical factors related to the comparison against last year’s temporary GST/HST holiday that reduced prices in December 2024.
The underlying inflation picture revealed concerning trends, with restaurant prices emerging as the largest contributor to faster CPI growth, signaling robust consumer demand. Grocery prices surged 5.0% annually, while core measures showed mixed signals with Bank of Canada core inflation at 2.8% versus the previous 2.9%. The data immediately boosted market expectations for potential Bank of Canada rate hikes this year, causing USD/CAD to dip modestly on the release.
Japanese Yen Finds Support Through Intervention Threats
Meanwhile, Japanese authorities intensified their verbal intervention campaign as USD/JPY approached the critical 158.00 level. Prime Minister Takaichi declared readiness to take “necessary action on speculative FX moves” while avoiding commentary on specific exchange rate levels. This represents a more aggressive stance from Japanese officials who have been closely monitoring yen weakness and its inflationary impact.
The intervention threats gained credibility following Bloomberg reports that Bank of Japan officials were paying increased attention to the weakening yen. USD/JPY pulled back from recent highs to around 157.93, though the pair continues to hover near levels that previously triggered actual intervention. The political backdrop adds complexity, with Takaichi’s expansive fiscal policies contributing to yen weakness while she simultaneously promises to improve Japan’s debt-to-GDP ratio.
Market Implications and Policy Crosscurrents
The convergence of these developments creates a challenging environment for currency traders and central bankers alike. Gold prices responded to the uncertainty by reaching new record highs, following the familiar safe-haven pattern established during previous trade tensions. The Federal Reserve now faces market expectations of 48 basis points of easing by year-end, though this could shift rapidly depending on how trade tensions evolve.
For the week ahead, markets will be watching whether Trump’s latest tariff threats represent genuine policy or negotiating tactics. Any de-escalation could quickly reverse dollar weakness, particularly if upcoming economic data shows continued strength. The Canadian dollar faces a delicate balance between inflation concerns that could support the currency and broader North American trade uncertainty that might weigh on it. Meanwhile, the yen’s stability depends on authorities’ willingness to back their verbal warnings with actual intervention if needed.
