Dollar tumbles on report of watered-down tariffs despite Trump pushback

• The US dollar fell by as much as 1% on Monday after a report on Donald Trump's tariff plans.
• It suggested the administration might impose tariffs on critical imports rather than blanket duties.
• Trump denied the report, and the dollar recovered some losses.

The US dollar fell on Monday after a report from The Washington Post suggested the incoming Trump administration could issue watered-down tariffs.

President-elect Donald Trump rebuked the report in a post on social media, prompting the dollar to recover some losses.

The US dollar index, which measures the dollar against a basket of six rival currencies, fell by as much as 1%, representing its biggest one-day decline since August. The Bloomberg Dollar Spot Index, which measures the greenback versus a basket of 10 rivals, posted its largest drop in over a year.

The Post's report said Trump's aides were reviewing plans to impose "universal" tariffs on every country but only on imports seen as critical to national or economic security.

It was unclear which imports would be considered critical to national or economic security. Still, some areas of the economy that could be subject to the tariffs include the defense supply chain via industrial metals; medical supplies; and energy production, including batteries and rare-earth elements.

Such tariffs would represent a significant scaling back from Trump's threats to issue blanket tariffs of 10% to 20% against some of America's closest allies, like Canada and Mexico.

"It looks as if officials are already preparing to water down the worst of Trump's campaign promises by narrowing the scope of the tariffs," Kyle Chapman, an analyst at the Ballinger Group, said.

In a post on Truth Social, Trump pushed back, calling the report "Fake News."

"The story in the Washington Post, quoting so-called anonymous sources, which don't exist, incorrectly states that my tariff policy will be pared back. That is wrong," Trump said.

The US dollar pared its losses to about 0.5% following Trump's response to the report.

ING Economics said investors should get used to the whiplash driven by conflicting reports on Trump's agenda.

"If there is one lesson to take from today's events, it is the increased volatility likely to accompany the speculation and delivery of the new administration's agenda," it said. "As one of our traders succinctly put it: 'welcome to the age of Trump 2.0.'"

The potential for broad-based Trump tariffs has investors focused on the potential for inflation to take off again, which would limit the Federal Reserve's ability to cut interest rates.

The 10-year US Treasury yield initially declined by about 3 basis points following the Post's report but reversed course and increased by 3 basis points after Trump's rebuttal.

James Knightley, an economist at ING Economics, said that if enacted, the full-scale tariffs Trump suggested during his campaign could lead to as much as $833 billion in cost increases for US importers.

Knightley said that about 60% of that cost increase would most likely be absorbed by US consumers, while companies would absorb some of the higher costs via lower profit margins.

Overall, Knightley estimated that the tariffs could lift inflation by as much as 2.5 percentage points.

But he added that while Trump "loves shaking up markets" with unpredictable policy announcements, "the final outcomes are often less dramatic than his initial announcements."