By Brigid Riley and Greta Rosen Fondahn

TOKYO/GDANSK (Reuters)

The dollar strengthened against major currencies on Tuesday following new tariff threats from the U.S., providing little respite for traders after a turbulent Monday. This turbulence was largely caused by the release of a low-cost Chinese artificial intelligence model that unsettled markets.

Trump’s earlier pledge to avoid increasing tariffs on trading partners was swiftly undermined by his announcement on Monday to impose tariffs on imported computer chips, pharmaceuticals, and steel to encourage domestic production.

The U.S. and Colombia avoided a potential trade war, as Colombian officials agreed to allow military aircraft to carry deported migrants from the U.S.

According to the Financial Times, Trump’s Treasury secretary nominee, Scott Bessent, is advocating for universal tariffs starting at 2.5%, increasing monthly. Francesco Pesole, a foreign exchange strategist at ING, noted that this announcement contradicted market expectations that tariffs would be implemented on a case-by-case basis, rather than universally.

Fears that tariffs would heighten inflation resulted in diminished U.S. rate cut expectations, strengthening the dollar. Following this, the euro declined 0.7% to $1.04155. The British pound dropped 0.6% to $1.2425, and the Canadian dollar fell 0.27% to 1.4412 against the U.S. dollar.

Trump has suggested potential 25% tariffs on imports from Canada and Mexico starting February 1, with threats to impose tariffs on the EU and China as well.

The dollar index, which gauges the U.S. currency against six others, increased by 0.2% to 108, recovering from a recent low of 106.96.

This volatility in the dollar is attributed to conflicting headlines regarding the extent of tariffs, according to Sim Moh Siong, a currency strategist at Bank of Singapore.

RISK-OFF MOVES REVERSED

Tariff discussions led traders to reverse some of the significant risk-off movements made on Monday, after a free open-source AI model from Chinese startup DeepSeek raised concerns regarding the valuation of U.S. AI leaders like Nvidia.

While the dollar may not be the top choice for safe-haven investments during equity selloffs, tariffs present a pressing long-term issue for the broader foreign exchange market, according to Pesole.

The yen retreated after climbing to its highest level since mid-December on safe-haven demand, with the dollar rising by 0.6% to 155.38 yen. Against the Swiss franc, the dollar increased by 0.47% to 0.9061, contrasting with a five-week low reached on Monday.

The yield on benchmark 10-year Treasury notes recovered after hitting a one-month low. The Federal Reserve began a two-day meeting on Tuesday, most likely holding interest rates steady; market observers await indications of possible future rate cuts if inflation trends toward the Fed’s 2% target.

Currently, money markets anticipate the Fed to cut rates by approximately 48 basis points this year, but no cuts are priced in until June. Fed officials have acknowledged potential repercussions from Trump’s trade and immigration policies, with minimal inflation progress projected for the year ahead.

The European Central Bank (ECB) is also scheduled to meet this week, with expectations to announce interest rate cuts.