The dollar index surged over 1% to around 109.8 on Monday, approaching two-year highs after President Donald Trump imposed sweeping tariffs on key trading partners over the weekend, raising concerns about a potential resurgence in inflation.

The US introduced 25% tariffs on goods from Mexico and Canada and a 10% levy on imports from China. In retaliation, Canada announced its own tariffs, Mexico indicated it would explore levies on US imports, and China stated it would file a lawsuit with the WTO.

In response to the tariff news, traders scaled back their bets on Federal Reserve interest rate cuts, now expecting around 41 basis points of easing this year.

The markets will also be closely watching the January nonfarm payrolls report on Friday, which could further influence the monetary policy outlook. The dollar strengthened across the board, with the Canadian dollar, Mexican peso, and other risk-sensitive currencies seeing the steepest declines.

Source: Trading Economics