Dollar Weakens on Greenland Drama: Pound and Euro Gain Strength
The US dollar fell sharply on Tuesday (January 20th) after the threat of a transatlantic trade war over Greenland's future prompted traders to reduce exposure to US assets. At 3:55 a.m. ET (8:55 a.m. GMT), the Dollar Index fell 0.9% to 98.340, near its lowest level in nearly two weeks.
This was the second straight day of decline, just as US investors were returning to work after Monday's holiday. The main trigger: Donald Trump rekindled the threat of tariffs against European allies, as he seeks to strengthen US control over Greenland—a semi-autonomous territory that is part of Denmark. Trump even asserted that Greenland is "critical to national and global security," and said he would discuss the issue with officials at the World Economic Forum (WEF) in Davos this week.
Europe immediately closed ranks. European leaders broadly rejected the demands and are scheduled to discuss responses and countermeasures at an emergency meeting of EU leaders on Thursday. According to ING analysts, developments in the Davos talks will determine whether the EU needs to take a tough stance: whether US tariffs on Europe actually take effect on February 1, and whether Europe retaliates with a €93 billion tariff package around February 6-7.
On the US data front, market focus on Tuesday will be on the weekly ADP jobs release. ING estimates the figure will remain in the 10,000-12,000 range, reflecting a US labor market that is "low, but not yet deteriorating," with recruitment.
In Europe, the pound sterling also rose as the dollar weakened. GBP/USD strengthened 0.5% to 1.3483, despite data showing the UK job market has not improved: the unemployment rate remains at 5.1% (the highest since early 2021) and wage growth (excluding bonuses) slowed to 4.5%. This situation opens the door for the Bank of England to cut interest rates again after previously cutting rates by 25 basis points to 3.75% in December, with the next meeting in early February.
The euro also strengthened. EUR/USD rose 0.6% to 1.1710, driven by dollar outflows. In Germany, producer prices (PPI) fell 2.5% year-on-year in December, as expected. The market is now awaiting the German ZEW sentiment index, which is expected to improve to a near one-year high—a sign of renewed optimism in the eurozone's largest economy.
In Asia, the story is different. USD/JPY actually rose 0.1% to 158.16—the yen did not strengthen despite the dollar's weakness. The market is monitoring Japanese Prime Minister Sanae Takaichi's announcement of a snap election on February 8, which is seen as opening up space for greater fiscal stimulus, while Japanese government bonds are experiencing selling pressure. The next focus is the Bank of Japan meeting on Friday, where the market remains divided over the likelihood of an interest rate hike.
Other currencies have moved relatively stable to strengthening. USD/CNY edged down 0.1% to 6.9588 after the People's Bank of Japan (PBOC) kept its benchmark lending rate unchanged (as expected), and the yuan remained near its strongest level in 2.5 years. On the FX commodity side, AUD/USD rose 0.6% to 0.6746, while NZD/USD surged 0.9% to 0.5841.
Source: Newsmaker.id
