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- Currencies continued to encounter volatility as FX markets reacted to Trump’s tariff threats on Europe over his push to buy Greenland.
- The US dollar declined as markets sold US assets and moved to safe-haven currencies such as the Swiss franc.
- Risk-on currencies like the pound and euro rebounded from their lows as European leaders prepared to retaliate with tariffs on US goods.
- Precious metals continued to break new record highs, supported by trade tensions between the US and Europe.
Global currencies saw significant volatility as US tariff threats against European allies over Trump’s push to buy Greenland sent investors scrambling for safe havens.
The US dollar weakened while risk-on safe haven currencies and precious metals surged to multi-year highs, reflecting mounting concerns about a potential trans-Atlantic trade war and its implications for the global economy.
US Dollar Extends Decline on Escalating Tensions
The US dollar index extended declines from the previous session as tensions rose between the US and Europe.
DXY 1H Chart / Source: TradingView
Over the weekend, Trump warned that eight European countries opposing the plan could face a 10% tariff from February 1, rising to 25% on June 1 unless a deal for Greenland is reached. ⁽¹⁾
European leaders condemned this action while weighing options for possible retaliation. Analysts have warned that Europe holds assets worth $10 trillion in US Treasuries and stocks, which could be used as leverage in any potential economic confrontation. ⁽²⁾
Markets will also be focusing on US economic data releases this week, such as the core PCE index, final Q3 GDP, and S&P PMIs.
Sterling and Euro Gain Ground Amid Dollar Weakness
The pound sterling and euro benefited from the dollar’s weakness. The pound rebounded from a four-week low while the euro recovered its ground after touching a three-month low.
GBP/USD 1H Chart / Source: TradingView
EUR/USD 1H Chart / Source: TradingView
Trump warned he could impose an additional 10% tariff on European nations in an effort to pressure Denmark into selling Greenland to the US. Any escalation in trade measures risks reopening a broader trade conflict between the US and the European Union, adding another layer of uncertainty to global markets.
The UK and Germany are both heavily exposed to US trade, which could likely feel the most impact. In response, the EU is already weighing retaliatory measures that could include up to €93 billion in tariffs on US goods.
UK Prime Minister Keir Starmer pushed back against the approach, arguing that using tariffs against allies is misguided and not an effective way to resolve disputes within an alliance. ⁽³⁾
On the data front, attention is also turning to the upcoming UK inflation report, with headline inflation expected to rise to 3.3%. Despite the uptick, markets have slightly increased expectations for rate cuts, now pricing in around 44 basis points of easing from the Bank of England by year-end, as tariff risks could weigh on growth. ⁽⁴⁾
Eurozone inflation has slipped below the European Central Bank’s 2% target, easing to 1.9% in December from 2.1% in November. Core inflation slowed to 2.3%, its lowest level in four months. The data may reinforce expectations that the ECB will keep rates on hold for an extended period. ⁽⁵⁾
Swiss Franc Surges on Safe Haven Demand
The Swiss franc extended gains from the previous session, climbing back toward its 2011 highs near 0.79, supported by strong safe haven demand. The move came as Trump’s tariff threats against Europe over Greenland unsettled markets, driving investors toward safe haven assets.
USD/CHF 1H Chart / Source: TradingView
Major EU states reacted sharply to the threats, with France and others calling them blackmail and considering a range of unprecedented economic countermeasures.
Meanwhile, investors will closely watch speeches from global central bankers at the World Economic Forum (WEF) in Davos, beginning January 20, when Swiss National Bank Chairman Martin Schlegel is scheduled to speak. ⁽⁶⁾
Japanese Yen Stable Amid Political Uncertainty
The Japanese yen rebounded despite political uncertainty in Japan.
USD/JPY 1H Chart / Source: TradingView
Investors are assessing fiscal and political implications after Japanese Prime Minister Sanae Takaichi said she will dissolve parliament on Friday and call a snap election for February 8, seeking support for increased spending and a new security strategy. ⁽⁷⁾
Investors focused on the Bank of Japan’s policy decision this week, with rates widely expected to remain unchanged and markets eyeing a possible move in June. Markets will watch for any hawkish signals from Governor Kazuo Ueda amid speculation of a possible rate increase in June. ⁽⁸⁾
Traders also remain alert to potential yen intervention by Japanese authorities, given concerns over the impact of a weak currency on domestic inflation.
Precious Metals Hit Record Highs
Gold and silver surged to new record highs, with gold reaching $4,715 while silver climbed to $94.3, supported by strong haven demand amid renewed US-EU trade tensions.
Gold 1H Chart / Source: TradingView
Silver 1H Chart / Source: TradingView
The rally in precious metals reflects rising market anxiety over geopolitical risks and growing trade tensions between major economic powers.
