US Dollar Rallies After Trump Backs Down on Greenland Tariff Threats

The U.S. dollar held on to significant overnight gains against major currencies on Thursday after President Donald Trump withdrew threats to impose tariffs on several European NATO nations, instead trumpeting the framework of a deal with NATO over control of Greenland. This dramatic reversal in tone from the White House sent shockwaves through financial markets, triggering a broad rally in U.S. assets and offering relief to investors who had been bracing for a potential trade war with key American allies.

Trump Walks Back Tariff Threats

In a surprising turn of events, President Trump announced that he had reached a framework for a deal with NATO regarding Greenland, though he provided no specific details about what such an arrangement would entail. In exchange for this diplomatic progress, Trump stated that he would not proceed with previously threatened tariffs on allied nations that had opposed his ambition to control the strategically vital Arctic territory. The presidents comments came during the World Economic Forum in Davos, where he had previously alarmed markets with aggressive rhetoric toward countries including Denmark, which maintains sovereignty over Greenland.

Market Relief After NATO Tensions

Trump’s earlier threat to levy tariffs on allied nations that opposed his Greenland ambitions had spooked financial markets and triggered a broad selloff of U.S. assets. However, his clarification in Davos that he had ruled out military action and was pursuing diplomatic solutions instead offered significant relief to investors. Chris Weston, head of research at Pepperstone, explained that traders quickly reacted to the reversal by cutting back on recently entered bearish risk positioning and long volatility hedges. Many market participants also rushed to cover their USD short positions while running more balanced exposure in gold and silver.

Dollar Holds Steady Against Major Rivals

The U.S. dollar held steady at $1.1688 per euro on Thursday, following a 0.3% rebound in the prior session when the president’s comments first buoyed sentiment. The greenback weakened slightly to 0.7947 Swiss francs after leaping 0.7% overnight in response to the tariff relief. Between Trump’s speech in Davos and his subsequent posts on social media, the market has largely removed what analysts described as the tail risk of a U.S. confrontation with its NATO partners, allowing currencies to stabilize near their post-announcement levels.

Aussie Dollar Surges to 15-Month High

The Australian dollar was among the biggest beneficiaries of the improved risk sentiment, rising as much as 0.7% to $0.68105, a level not seen since October 2024. The currency also vaulted as much as 1% to the highest since July 2024 at 108.03 yen. This remarkable rally was driven not only by the overall improvement in global risk appetite but also by domestic Australian data showing an unexpected decline in the jobless rate. December employment figures revealed a surge in hiring that was more than double what economists had predicted, fueling speculation that the Reserve Bank of Australia may need to raise interest rates at its upcoming policy meeting.

RBA Hike Odds Increase

Today’s red-hot jobs report has dramatically increased the chances of an RBA rate hike at the February 2-3 policy meeting, according to IG analyst Tony Sycamore. The data showed the Australian jobless rate dropping to a seven-month low, a development that aligns with the RBA’s recent assessment that labour market conditions remain tight. While monthly labour force data can be volatile and subject to noise, the December report provides compelling evidence that Australia’s economy continues to perform strongly despite global uncertainties.

Yen Under Pressure

In contrast to the dollar and Aussie, the yen remained under pressure throughout Thursday’s trading session, matching last week’s record low versus the euro at 185.56 per euro. The Japanese currency weakened 0.2% to trade at 158.68 per U.S. dollar, near last week’s 18-month trough of 159.45. This weakness came after Japanese Prime Minister Sanae Takaichi called a snap election and pledged measures to loosen fiscal policy, raising concerns about potential fiscal excess. Barclays analysts indicated they expect the yen to remain vulnerable to depreciation pressure for the foreseeable given domestic fiscal concerns and robust demand among Japanese investors for overseas assets.

Bank of Japan Policy Meeting

The Bank of Japan kicked off a two-day policy meeting on Thursday, though market participants largely expected no change in interest rates given that the central bank had already raised its policy rate at its previous meeting last month. Despite the lack of immediate action expected, investors will carefully scrutinize any guidance from BOJ officials for hints about future policy direction. The yen’s continued weakness against major currencies adds complexity to the bank’s deliberations as it balances concerns about inflation against the potential economic impact of a rapidly depreciating currency.