The dollar retreated to its lowest level in a week in early trading on Tuesday after threats from the White House towards the European Union over the future of Greenland triggered a broad selloff across U.S. stocks and government bonds.

Dollar Index Performance

The dollar index, which measures the greenback's strength against a basket of six currencies, experienced notable weakness amid geopolitical tensions.

On Monday, Trump's renewed tariff threats against European allies triggered a repeat of the so-called "Sell America" trade that emerged after last year's Liberation Day tariff announcement in April, with stocks, Treasury bonds and the dollar all selling off.

Market Analysis and Investor Sentiment

Investors were dumping dollar assets on "fears of prolonged uncertainty, strained alliances, a loss of confidence in U.S. leadership, potential retaliation and an acceleration of de-dollarization trends," said Tony Sycamore, market analyst at IG in Sydney.

"While there are hopes the U.S. administration may soon de-escalate these threats, as it has with prior tariff announcements, it is clear that securing Greenland remains a core national security objective for the current administration," he added.

Federal Reserve Expectations

Fed funds futures are pricing an implied 94.50% probability that the U.S. central bank will remain on hold at its next two-day meeting next week, little changed from Friday, according to the CME Group's FedWatch tool. U.S. markets will return on Tuesday following a public holiday for Martin Luther King Jr. Day.

Major Currency Pairs Performance

Currency markets showed mixed movements across major pairs amid the dollar weakness:

Against the yen, the dollar was flat at 158.175 yen after Japanese Prime Minister Sanae Takaichi called snap elections for February 8. Her vow to suspend an 8% sales tax on food for two years has focused attention on the country's shaky public finances.

Cryptocurrency and Regional Developments

Digital assets also faced pressure, with Bitcoin off 0.60% at $92,336.99, while ether fell 1.10% to $3,174.41.

Later on Tuesday, the People's Bank of China is expected to leave benchmark lending rates unchanged for an eighth straight month in January, a Reuters survey showed. The Australian dollar was down 0.10% at $0.6710, while the New Zealand dollar slipped 0.10% to $0.5794, edging back from a two-week high.

The US dollar faced significant pressure on Monday as investors fled to safe-haven currencies following President Trump's latest tariff threats against European nations over Greenland. The announcement triggered a broad risk-averse movement across global markets, with the Japanese yen and Swiss franc emerging as primary beneficiaries of the flight to safety.

Trump's Tariff Announcement Sparks Market Volatility

Trump announced over the weekend his intention to impose an additional 10% import tariff starting February 1 on goods from eight European nations: Denmark, Norway, Sweden, France, Germany, the Netherlands, Finland, and Britain. The tariffs will remain in place until the United States is allowed to purchase Greenland from Denmark.

Major European Union states responded strongly to the threats, with France and other nations describing them as blackmail and proposing a range of previously untested economic countermeasures in response.

Initial Currency Market Reactions

The foreign exchange market's immediate response in early Asian trading saw significant selling pressure on European currencies:

However, as the trading day progressed, both the euro and British pound bounced from their lows as investors began reassessing the broader implications of Trump's announcement on the dollar's global standing.

Dollar Weakness Against Safe Havens

The greenback's decline was most pronounced against traditional safe-haven currencies as risk sentiment deteriorated:

Market analysts drew parallels to previous instances when Trump's trade announcements led to dollar weakness, particularly referencing last April's "Liberation Day" announcement that triggered a crisis of confidence in US assets.

Market Analysis and Outlook

Michael Brown, senior research strategist at Pepperstone, suggested that the current situation might resolve similarly to previous trade disputes. "My working assumption is that an 'off ramp' from these threats will soon be found, and that this turns into yet another 'TACO moment', or an example of the 'art of the deal', depending on how one views these things," Brown stated.

Regional Currency Performance

Other major currencies showed mixed performance amid the dollar weakness:

• Australian Dollar: Down 0.02% to $0.6690, with losses limited by broad dollar weakness
• New Zealand Dollar: Rose 0.16% to $0.5761

The risk-sensitive Australian dollar's minimal decline reflected the offsetting effects of dollar weakness against broader risk-off sentiment in global markets.