Dollar starts week on front foot on Trump’s Colombia tariffs

The dollar began the week with modest gains after a brief threat of US tariffs on Colombia made clear the trade risk that still hangs over the currency market.

President Donald Trump threatened to place new tariffs on the Latin American nation for refusing to allow deported migrants to land in the country, fuelling demand for haven assets on concern protectionist US trade policies will hurt global growth.

The Bloomberg Dollar Spot Index rose as much as 0.3%, before paring gains after the White House said Colombia had agreed to all its terms. The 10-year Treasury yield fell three basis points to 4.59%. The Australian and New Zealand dollars retreated with the yuan, with an unexpected slowdown in Chinese manufacturing activity also weighing.

The US president gave investors fresh reason to fret over trade by ordering an emergency 25% tariff on all Colombian goods coming into the US for refusing to allow deported migrants to land in the South American country. That was a reversal from last week when Trump refrained from slapping tariffs immediately on US trade partners.

“The situation with Colombia just shows how little it takes for Trump to use tariffs as a negotiation tool,” said Dane Cekov, a senior macro and foreign-exchange strategist at Sparebank 1 Markets AS in Oslo. “More will come on the tariff front and the US dollar rally is far from over.”

The Mexican peso slid more than 1% as Trump’s action against Colombia rekindled his threat of hitting Mexico with tariffs by Feb. 1. Eastern European and Latin American currencies paced gains in the best week for emerging markets since July 2023 last week.

The dollar’s advance came amid some signs that investors were weighing widely-favored bullish wagers on the greenback. Speculators pulled back from their most bullish positions since 2017 during the week to January 21, according to Bloomberg analysis of data from the Commodity Futures Trading Commission.

Goldman Sachs Group strategists estimated that traders had unwound some two-thirds of the tariff risk premium they had priced into the euro-dollar pair, even as the analysts continue to expect US economic outperformance and trade measures to support the greenback in the months ahead.

“The dollar was hurt last week by stories of delayed tariffs,” Win Thin, global head of markets strategy at Brown Brothers Harriman & Co., wrote in a note. “But that should reverse this week now that the tariff wars are upon us.”

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