Dollar drifts lower as traders ponder Trump tariff plans

By Chuck Mikolajczak

NEW YORK (Reuters) -The dollar was little changed on Wednesday after earlier dipping to a new two-week low, as investors continued to await concrete announcements about U.S. President Donald Trump's tariff plans.

Trump said late on Tuesday his administration was weighing imposing a 10% tariff on goods imported from China on Feb. 1, after he earlier said Mexico and Canada could face levies of around 25% by Feb. 1.

He also promised duties on European imports, without elaborating further.

After hitting a more than two-year high of 110.17 yen last week largely on anticipation of tariffs, the greenback has shown signs of an overcrowded trade reversing on the lack of firm plans from Trump. It was down about 1.2% on the week and in five of the previous seven sessions.

"We were due for some sort of correction and the fact that we didn't get any big bang on tariffs day one kind of sparked that profit taking," said Brad Bechtel, global head of FX at Jefferies in New York.

"The market didn't have a huge amount of tariff premium built in, it had a little bit and that's what's been taken out of the market now, but a lot of the move is really been more Fed expectations and interest rate differentials."

ECB DECISION

The dollar index, which measures the greenback against a basket of currencies, rose 0.01% to 108.14, after it early dipped to 107.75, its lowest since Jan. 6.

The euro was down 0.08% at $1.0421. Multiple European Central Bank policymakers backed further rate cuts in comments on Wednesday, indicating a reduction next week is virtually locked in and further moves lower are likely to come even if the U.S. Federal Reserve takes a more deliberate approach.

Markets are pricing in a roughly 96% chance for a cut of at least 25 basis points from the ECB at its policy meeting next week, according to LSEG data.

Trump on Monday signed a broad trade memorandum, ordering federal agencies to complete comprehensive reviews of a range of trade issues by April 1, which many market participants believe will be a key date in revealing tariff plans.

On Wednesday, Trump said he would add new tariffs to his sanctions threat against Russia if the country does not make a deal to end its war in Ukraine, adding they could also be applied to "other participating countries." The rouble was last up 0.25% against the greenback to 99.246 per dollar.

Against the Japanese yen, the dollar strengthened 0.66% to 156.50. Markets are pricing in an 88.3% chance of a rate hike of at least 25 basis points at the Bank of Japan's meeting on Friday.

Sterling weakened 0.22% to $1.2327. The Office for National Statistics said Britain ran a bigger-than-expected budget deficit in December, swelled by debt interest costs and a one-off purchase of military homes, highlighting fiscal pressure for finance minister Rachel Reeves.

The Canadian dollar was down 0.33% to C$1.44 per dollar, falling to a near five-year low on Tuesday of C$1.4515 as data showing cooling inflation last month added pressure.

Analysts at Deutsche Bank said they see the Canadian dollar to greenback as "one of the most under-priced FX crosses for an FX trade war."

The Mexican peso strengthened 0.83% versus the dollar at 20.466.

China's yuan weakened 0.15% against the greenback to 7.28 per dollar in offshore trading, after pushing to the strongest level since Dec. 11 on Tuesday.

(Reporting by Chuck Mikolajczak; Editing by Cynthia Osterman)