Traders largely shrug off tariffs before US consumer price data

By Karen Brettell

NEW YORK (Reuters) -The euro dipped on Monday and the dollar gained against a basket of currencies, as traders largely shrugged off new tariffs ahead of key U.S. inflation data on Tuesday.

U.S. President Donald Trump threatened on Saturday to impose a 30% tariff on imports from Mexico and the European Union starting on August 1, after weeks of negotiations with the major trading partners failed to reach a comprehensive trade deal.

But markets have become increasingly immune to tariff headlines since Trump in April first announced larger than expected trade levies, then delayed their implementation.

"It's something that's happened before and the shock value is gone," Joseph Trevisani, senior analyst at FX Street, said. At the same time, "the negative predictions haven't come to pass so I don't think you're going to get too much more emphasis for the markets out of tariffs."

The European Union on Monday accused the U.S. of resisting efforts to strike a trade deal and warned of countermeasures if no agreement is reached to avoid the punishing tariffs.

Federal Reserve Chair Jerome Powell has said that he expects inflation to increase this summer as a result of tariffs, which is seen keeping the U.S. central bank on hold until later in the year.

Investors will be watching consumer price inflation data for June on Tuesday for any signs that price pressures are accelerating again.

Economists polled by Reuters expect headline inflation to increase to 2.7% on an annual basis, up from 2.4% the prior month. Core inflation is expected to rise to 3.0%, from 2.8%.

Fed funds futures traders are pricing in 50 basis points of interest rate cuts by year-end, with the first reduction expected in September.

Markets are also focused on the U.S. fiscal and debt outlook and whether Trump will replace Powell as he criticizes him for delaying interest rate cuts and for renovation costs at the Fed's headquarters.

Trump on Monday renewed his attacks on Powell, saying interest rates should be at 1% or lower.

The greenback also got a boost after Trump announced new weapons for Ukraine on Monday, and threatened to slap buyers of Russian exports with sanctions unless Russia agrees to a peace deal in 50 days, a major shift in policy brought on by frustration with Moscow.

The euro was last down 0.16% at $1.167 and earlier reached a three-week low of $1.1649. The dollar index rose 0.19% to 98.07.

Trump's tariff threats are complicating the European Central Bank's decision-making but is unlikely to derail plans for a pause in rate cuts next week, five ECB policymakers told Reuters.

The greenback has been supported by higher Treasury yields this month, following a selloff that has left the index down almost 10% year to date.

But many analysts expect the U.S. currency to face further weakness. BCA Research says the euro is in a multi-year bull market against the dollar, with the single currency on track to eventually reach $1.40.

"The US current account deficit is becoming increasingly difficult to finance," strategists at the firm said in a report. "Europe, by contrast, is emerging from stagflation into a low-inflation recovery, aided by lower energy prices and the end of fiscal austerity."

"Structural reforms, deeper integration, and improved capital markets are strengthening the euro’s long-term appeal," they added.

Against the Japanese yen, the dollar strengthened 0.22% to 147.72, the highest since June 23.

The Mexican peso weakened 0.39% versus the dollar to 18.719.

The British pound fell 0.52% to $1.3429, the lowest since June 23.

Bank of England Governor Andrew Bailey said on Monday that uncertainty continues to weigh on growth expectations, in a letter to G20 finance ministers and central bank governors, urging vigilance against the risk of disruptive market moves.

Bitcoin surpassed $120,000 for the first time on Monday, marking a milestone for the world's largest cryptocurrency as investors bet on long-sought policy wins for the industry this week. 

It was last up 0.42% to $119,633 and earlier reached $123,153.

(Reporting by Karen Brettell; Additional reporting by Rae Wee and Lucy Raitano; Editing by Andrew Heavens and Sandra Maler)