On Tuesday, the U.S. dollar weakened significantly as concerns over a potential trans-Atlantic trade confrontation concerning the future of Greenland led market participants to reduce investments tied to U.S. markets. The Dollar Index, which measures the greenback against a basket of six major foreign currencies, dropped 0.9% to reach 98.340 by 03:55 ET (08:55 GMT), marking a near two-week low.
Following the U.S. holiday on Monday, renewed rhetoric from President Donald Trump intensified tariff threats aimed at European partners as part of efforts to assert influence over Greenland, a semi-autonomous Danish territory.
"Greenland is imperative for National and World Security. There can be no going back," Trump stated late Monday. He also indicated plans to meet with multiple officials during the World Economic Forum in Davos, Switzerland, later this week to discuss the issue.
European leaders have largely dismissed these overtures concerning Greenland and are preparing to hold an emergency meeting of the European Union's leadership on Thursday. The agenda includes discussions on the Greenland matter and strategies for potential retaliatory actions.
Analysts at ING remarked, "The outcome of the Davos discussions will critically inform whether EU leaders adopt a tougher stance during Thursday's meeting, determine if U.S. tariffs on Europe take effect on February 1, and assess the likelihood of Europe responding with a €93 billion tariff package scheduled for February 6 and 7." The primary economic report due from the U.S. Tuesday is the weekly ADP employment data, which is expected to indicate job growth in the range of 10,000 to 12,000 positions, reflecting a subdued yet stable U.S. labor market, according to ING analysts.
In European currency markets, GBP/USD appreciated by 0.5% to 1.3483, buoyed by the greenback's weakness. This gain occurred despite data revealing the U.K. unemployment rate holding steady at 5.1% in the three months to November, a level consistent with the previous month and representing the highest since early 2021. Concurrently, wage growth declined to an annual rate of 4.5%, excluding bonuses, indicating potential pressure for the Bank of England to consider further interest rate reductions in the near term. The central bank recently reduced its key interest rate by 25 basis points to 3.75% in December and is scheduled to reconvene in early February.
Meanwhile, EUR/USD advanced 0.6% to 1.1710, with the single currency benefiting from a broad shift away from the U.S. dollar. German producer prices fell by 2.5% year-over-year in December, in line with forecasts, while market focus now turns to the German ZEW economic sentiment index for today, which is anticipated to reflect rising confidence in the eurozone's largest economy, possibly reaching levels not seen in a year.
ING analysts note, "EUR/USD recently surpassed technical resistance around 1.1640 to 1.1650 and appears inclined to challenge the 1.1690 to 1.1700 region." However, they caution that conditions remain distant from those that would precipitate a major sell-off in the dollar.
Turning to Asia, the Japanese yen underperformed despite the general dollar weakness, with USD/JPY increasing slightly by 0.1% to 158.16. This movement coincided with Prime Minister Sanae Takaichi's announcement of a snap election scheduled for February 8. High approval ratings for Takaichi suggest her reappointment, which is expected to facilitate continued fiscal stimulus measures.
Market skepticism remains regarding the extent of additional fiscal spending possible, as evidenced by a continued selloff in Japanese government bonds. The election announcement precedes an upcoming Bank of Japan meeting on Friday, with investors divided on whether the central bank will possess sufficient justification to raise interest rates further.
Elsewhere, the USD/CNY pair declined marginally by 0.1% to 6.9588, largely stable after the People's Bank of China maintained its loan prime rate unchanged, as widely anticipated. The yuan remains near its strongest levels in over two and a half years, supported by a series of robust midpoint fixes issued by the central bank.
In the commodities-influenced currencies, AUD/USD rose 0.6% to 0.6746 while NZD/USD climbed 0.9% to 0.5841, reflecting gains alongside the weak dollar environment.