Trump's tariff threat on China sinks dollar

By Karen Brettell and Amanda Cooper

NEW YORK (Reuters) -The dollar dropped on Friday after U.S. President Donald Trump threatened to hike tariffs against China, reigniting concerns over how the trade war will impact the U.S. economy.

Trump also said he may cancel a planned meeting with Chinese President Xi Jinping and complained on social media about what he called China's plans to hold the global economy hostage after China dramatically expanded its rare earths export controls on Thursday.

The comments lifted the euro and the yen against the greenback, while currencies linked to commodities and raw materials, including the Australian dollar, fell.

"Ultimately, it does create a lot of negativity for the U.S. economy," said Juan Perez, director of trading at Monex USA in Washington. "Is China really going to have to be very retaliatory moving forward in order to get the United States to negotiate better? So it creates a lot of doubt.”

The dollar index was last down 0.4% a 98.99. It is still on track for a weekly gain of 1.66%, the largest since September 2024, after the Japanese yen and euro this week were hurt by fiscal concerns in their regions.

Traders are also watching for signs on when the U.S. federal government will reopen and release data that will shape Federal Reserve policy.

The U.S. Bureau of Labor Statistics said on Friday it would publish September's consumer inflation report on October 24 to assist the Social Security Administration determine the annual cost-of-living adjustment for 2026.

It comes after many Fed officials expressed concern at their last meeting over inflation risks.

"A lot of the easing that central banks either have done, or in the case of the Fed are considering, is being done with a very finely tuned sensitivity to inflation," said Eric Theoret, FX strategist at Scotiabank in Toronto.

Traders are pricing in a 97% chance that the Federal Reserve cuts rates by 25 bps at its October meeting, while the odds of an additional cut in December are at 92%, according to the CME Group's FedWatch Tool.

YEN WEAKENS ON FISCAL FEARS

The Japanese currency has dropped this week on concerns that the Bank of Japan may not hike interest rates again this year after fiscal dove Sanae Takaichi's surprise victory to lead the ruling party, stoking worries of Japanese authorities needing to step in to support the yen.

Japanese Finance Minister Katsunobu Kato said on Friday that the government was concerned about excessive volatility in the foreign exchange market. 

"Today was the first time that the Minister of Finance expressed a verbal intervention, cautioning about excessive moves in the yen," said Marc Chandler, chief market strategist at Bannockburn Global Forex in New York. 

Japanese officials last year expressed concern about a move that weakened the currency by 10 yen in a month and Chandler said a similar move today from the September 17 low would indicate concern around the 155.5 yen level.

The yen was last up 0.86% against the greenback to 151.73 per dollar. But the dollar is headed for a 2.9% weekly gain on the currency for the week, its biggest advance since September 2024. The yen has weakened from 147.44 yen per dollar last Friday. 

Takaichi said on Thursday she did not want to trigger excessive declines in the yen. She added that the BOJ is responsible for setting monetary policy but that any decision it makes must align with the government's goal. 

She looked set to become prime minister in a parliament vote that was expected on October 15. But the date will be likely pushed back after the Liberal Democratic Party's junior coalition partner Komeito pulled its support, breaking their 26-year-old alliance. 

FRENCH DRAMA DENTS EURO

The euro was up 0.38% on the day at $1.1607 but headed for its biggest weekly decline since July at 1.15% due to political turmoil in France.

President Emmanuel Macron welcomed mainstream political leaders to a crunch meeting at the Elysee ahead of a self-imposed late-Friday deadline to name a new prime minister, as the country's central bank chief warned political disorder was sapping growth.

The political paralysis has made it challenging to pass a belt-tightening budget and has made investors increasingly worried about France's worsening deficit, on top of evidence of slowing momentum in other key economic engines such as Germany.

"The data from Germany's not good, and therefore I think that makes the euro a little bit more susceptible to wobbles on the French news," said Rabobank chief strategist Jane Foley.

The Canadian dollar jumped against the greenback after data on Friday showed that Canada's economy posted a surprise 60,400 net job gains in September.

"The market's still leaning towards cuts for Canada, but definitely shaving off a bit of the bias in that direction," said Theoret.

The loonie was last up 0.15% versus the greenback at C$1.4 per dollar.

In cryptocurrencies, bitcoin fell 2.98% to $117,568.

(Reporting by Karen Brettell; Additional reporting by Amanda Cooper; Editing by Emelia Sithole-Matarise, Nia Williams and Toby Chopra)