The US dollar gained on Monday, recovering from recent losses as attention turned back to the potential for trade tariffs under the Trump administration at the start of a week in which the Federal Reserve is set to hold its monetary policy meeting.

The dollar index, which analyzes the behavior of the greenback in comparison with a basket of six other currencies, rose by around 0.1% to 107.310, having fallen by more than 1% this week.

The Threat of Tariffs Boosts the Dollar

Last week, the dollar posted its weakest performance since November 2023, as Donald Trump appeared to temper the risk of trade tariffs, prompting traders to reduce the risk premium embedded in the currencies of major US trading partners.

However, these concerns resurfaced after the United States successfully leveraged the threat of import tariffs against Colombia to achieve its political objective of returning illegal immigrants.

“The use of tariffs as political leverage is now well understood by the market, and it may be worth reducing marginal volatility,” analysts at ING said in a note. “That said, the currency market is still operating under the shadow of a potential February 1st deadline for tariffs against Mexico, Canada, and China, which may limit the dollar’s downside this week.”

Expectations of high tariffs on products from key trading partners—including Canada, Mexico, China, and the eurozone—have renewed concerns about inflation, providing upward momentum for the dollar.

The Federal Reserve will conclude its latest two-day monetary policy meeting on Wednesday, and it is widely expected to leave interest rates unchanged.

Euro Falls Ahead of ECB Meeting

In Europe, the EUR/USD pair rose 0.1% to 1.0489 after a surprise improvement in German business morale in January, driven by a more optimistic assessment of the current economic situation, according to a survey released on Monday.

The Ifo Institute reported that its business climate index increased to 85.1 in January from 84.7 in December, while the current conditions index rose to 86.1 from the previous month’s 85.1.

This follows an improvement in eurozone activity data reported the previous week, suggesting the region’s economy is gradually improving.

However, the European Central Bank (ECB) is expected to cut interest rates once again at its upcoming meeting. Traders are awaiting further signals from ECB President Christine Lagarde, which could influence expectations for the three additional rate cuts projected for this year, following Thursday’s anticipated move.

“The EUR/USD pair is likely to remain in a range of 1.0400–1.0500 in the short term, with the next catalysts for a move being the FOMC and ECB meetings on Wednesday and Thursday, respectively,” ING stated.

Meanwhile, the GBP/USD pair traded 0.1% lower at 1.2460, with the pound showing signs of weakness ahead of the next Bank of England (BoE) meeting in early February.

“We believe there are valid reasons for GBP/USD to trade at 1.19–1.20 by the end of this year, as the BoE accelerates its easing cycle and the Chancellor may need to introduce further fiscal adjustments later this year,” ING added.

Yuan Falls After Weak Chinese PMI Data

In Asia, USD/JPY declined 0.6% to 154.76, with the yen gaining support from the Bank of Japan’s (BoJ) interest rate hike the previous week. The BoJ also signaled plans for additional rate increases in the coming months if its economic outlook aligns with current estimates.

The USD/CNY pair rose 0.2% to 7.2603 after China’s manufacturing activity unexpectedly contracted in January, as Beijing’s recent stimulus measures provided only modest support to local businesses.

Simultaneously, growth in the non-manufacturing sector slowed significantly during the month, with local companies grappling with uncertainty over the potential for increased US trade tariffs.