By Stefano Rebaudo and Kevin Buckland
(Reuters) -The U.S. dollar edged up from levels close to its 11-week low on Wednesday as U.S. Treasury yields bounced back after recent declines amid weak economic data and uncertainty over tariff implementation.
On Tuesday, signs of deceleration in the U.S. economy and concerns about the impact of U.S. policy sent investors searching for refuge in safe-haven bonds.
“Headlines about tariffs, as opposed to tariffs themselves, raise policy uncertainty, which can delay business undertakings, and thus be disinflationary,” said Thierry Wizman, global forex and rates strategist at Macquarie.
“This puts the Federal Reserve in a bind, as it must balance the disinflationary impulse from a policy uncertainty spike, with inflation from the prospect of actual tariffs later,” he added.
The U.S. dollar index, which measures the currency against six major rivals, added 0.15% to 106.41, rising from this week’s low of 106.12, the weakest level since December 10.
The 2-year U.S. Treasury yield declined as low as 4.074% on Tuesday for the first time since November 1, but was up 2 basis points (bps) at 4.1168% on Wednesday in London trade.
U.S. Treasury Secretary Scott Bessent said on Tuesday the economy was more fragile under the surface than economic metrics suggest, citing interest rate volatility, sticky inflation and job growth dependence on the government sector, adding that tariffs are an important source of revenue.
Money markets are currently pricing 55 bps of Fed rate cuts [IRPR] by year end, which imply two 25 bps easing moves and a 20% chance of an additional cut.
“With more voices from the European Central Bank arguing in favour of pausing its cutting cycle sooner rather than later, the prospects look good for a further favourable move in spreads for the euro/dollar,” said Derek Halpenny, head of research, global markets at MUFG, adding that tariff threats keep the single currency capped.
The euro was 0.1% lower to $1.0501, after reaching $1.0528 on Monday, its highest since January 27.
ECB board member Isabel Schnabel said it was no longer clear the current 2.75% rate is holding back the economy. Policymakers are discussing how much further rates must fall when inflation is still a bit too high.
Optimism for more spending in Germany has supported the single currency, although election winner Friedrich Merz on Tuesday ruled out a rapid reform to state borrowing limits known as the “debt brake”.
The Canadian dollar edged down to a fresh two-week low and the Mexican peso was little changed ahead of a possible new round of tariffs from the U.S.
Trump said on Monday that duties against Canada and Mexico would proceed as scheduled, ostensibly from March 4.
However, Mexican President Claudia Sheinbaum said on Tuesday she expected to reach an agreement that could head off a potential trade war with the U.S.
Canadian minister Francois-Philippe Champagne told reporters that discussions to convince Trump that Canada has done enough to address U.S. concerns over border security would continue.
The dollar rose as high as C$1.433, its strongest level since February 12. It dropped 0.1% to 20.4464 Mexican pesos.
The U.S. currency gained 0.2% to 149.32 yen, rebounding from Tuesday’s low of 148.56 yen, its weakest since October 11.
The Australian dollar eased 0.2% to $0.6328 after data earlier in the day showed growth in consumer prices had dipped month-on-month in January, which may reassure the central bank of a cooling in inflation.
Bitcoin, the largest cryptocurrency by market capitalisation, was little changed at $88,416, after slumping 5.6% on Tuesday and touching the lowest level since mid-November at $86,003.11.
Market nerves over U.S. tariffs have reinforced the blow to crypto investor confidence from last week’s $1.5 billion hack of ether from the Bybit exchange.
(Reporting by Stefano Rebaudo and Kevin Buckland; Editing by Christopher Cushing, Jamie Freed and Aidan Lewis)
