The U.S. dollar maintained its overnight gains against major currencies on Thursday as markets digested President Donald Trump’s abrupt reversal on threatened tariffs against European NATO members, while the Australian dollar surged to a 15-month peak on robust employment figures and shifting rate expectations.
In a dramatic about-face that sent relief rippling through global markets, Trump announced Wednesday that he had secured a “framework deal” with NATO regarding Greenland and would therefore not impose the punitive tariffs he had threatened against allied nations opposing his territorial ambitions. The announcement, delivered via his Truth Social platform, offered scant details about the arrangement’s specifics, leaving analysts and market participants to parse the implications.
The president’s earlier threats had rattled investors and triggered a widespread sell-off of U.S. assets, raising concerns about a potential fracturing of transatlantic relations. However, his explicit ruling out of military action during remarks at the World Economic Forum in Davos provided crucial reassurance to jittery markets.
“From a European perspective, it is too early to rejoice,” cautioned Volkmar Baur, forex strategist at Commerzbank, noting the absence of concrete details. Still, Baur suggested the volatility may prove temporary, predicting that “the most likely outcome is still that the next wave of excitement will pass us by after a brief period of volatility and that the market will refocus on central banks and interest rate differentials.”
The dollar traded at $1.1690 per euro on Thursday, consolidating after a 0.35% rebound in the previous session. Against the Swiss franc, the greenback eased slightly to 0.7942 francs following Wednesday’s 0.7% surge.
The Australian dollar emerged as Thursday’s standout performer, vaulting 0.6% to reach $0.6802—its strongest level since October 2024—marking a fourth consecutive daily advance even as broader risk assets faced headwinds earlier in the week.
The antipodean currency’s strength followed unexpectedly robust labor market data that dramatically shifted interest rate expectations. Australia’s unemployment rate fell to a seven-month low in December, while employment growth exceeded forecasts, prompting markets to reassess the Reserve Bank of Australia’s policy trajectory.
Rate hike probabilities for next month now exceed 50%, a sharp increase from just 29% before the data release—a swing that powered the Aussie to fresh multi-month highs.
“The strength of both the Australian and the New Zealand dollar is the latest example that speculation about moves in short-term interest rates in relation to central bank policy remains alive and well,” observed Jane Foley, senior forex strategist at Rabobank.
Against the yen, the Australian dollar jumped as much as 1% to 108.03 yen, its highest level since July 2024.
The Japanese yen remained under persistent pressure Thursday, slipping 0.3% to touch 185.56 per euro—matching the record low set last week—while weakening 0.2% to 158.68 against the dollar, hovering near last week’s 18-month trough of 159.45.
The yen’s vulnerability comes as the Bank of Japan begins a two-day policy meeting on Thursday, though market participants broadly expect no change to the policy rate following last month’s hike. The central bank’s deliberations are complicated by Prime Minister Sanae Takaichi’s recent call for snap elections and pledges to pursue looser fiscal policy—a combination that has weighed on the currency.
Analysts anticipate the BOJ may adopt a more hawkish tone when the decision is announced Friday in an effort to stabilize the yen, which is trading uncomfortably close to the 159-160 levels widely viewed as potential intervention thresholds by Japanese authorities.
Adding to the complex policy backdrop, Japan’s super-long-dated government bonds extended gains Thursday on expectations that the finance ministry could introduce measures to contain further yield increases.
With Trump’s tariff drama temporarily subsiding, attention is shifting back to economic fundamentals. Economists are eagerly awaiting the release of October and November PCE inflation estimates—the Federal Reserve‘s preferred inflation gauge—later Thursday, representing a crucial missing piece as analysts work to clear the data fog created by last autumn’s U.S. lockdown measures.
The figures could provide important signals about the Fed’s policy path and help recalibrate market expectations for U.S. interest rates, potentially influencing dollar direction in the sessions ahead.
As markets navigate this confluence of geopolitical uncertainty, diverging central bank policies, and evolving economic data, currency traders appear to be rediscovering their focus on traditional drivers of exchange rates—a potentially stabilizing development after days of tariff-induced turbulence.
WHAT YOU SHOULD KNOW
Markets responded positively to Trump’s tariff retreat after he announced a vague “framework deal” with NATO over Greenland, stabilizing the dollar and easing concerns about transatlantic tensions—though details remain conspicuously absent.
Australia’s surprise jobs boom drove the Aussie dollar to 15-month highs as rate hike expectations jumped from 29% to over 50%, demonstrating that central bank policy outlook still dominates currency movements.
The Japanese yen continues sliding toward intervention levels (near 159-160 per dollar), pressured by fiscal loosening pledges ahead of snap elections, while the Bank of Japan is expected to signal hawkishness Friday without actually raising rates.
