Dollar gains on euro, yen, but tariffs keep investors cautious

By Karen Brettell

NEW YORK (Reuters) -The dollar rose against the euro and yen on Tuesday, showing tentative signs of recovery following a sharp selloff that saw the dollar index tumble more than 3% last week.

Investors nonetheless remain cautious on concerns about the impact of U.S. President Donald Trump's trade tariffs on the U.S. economy.

Rapid shifts in tariff announcements have reduced faith in U.S. policymakers and led investors to seek calmer waters outside of the United States, which last week sent Treasury yields sharply higher and dented the appeal of the greenback.

"The dollar has been primarily driven by asset flows rather than traditional short-term drivers such as rate differentials," said Vassili Serebriakov, FX and macro strategist at UBS, adding that "it does appear that the market is driven by a rethink of U.S. exceptionalism."

Factors driving the move away from the U.S. include "the slowdown in the U.S. economy, uncertainty about tariffs, broader U.S. policy uncertainty, improved sentiment towards Europe, rotations out of U.S. tax, things like that," Serebriakov said.

Data on Tuesday showed that U.S. import prices unexpectedly fell in March, pulled down by decreasing costs for energy products, the latest indication that inflation was subsiding before Trump's sweeping tariffs came into effect.

Trading this week has so far been relatively calm but investors remain cautious as they wait on further tariff clarity.

"Last week was all about deleveraging, liquidation, and asset re-allocation out of U.S. assets. This week's tone is calmer in what is a holiday-shortened week," said Prashant Newnaha, senior Asia-Pacific rates strategist at TD Securities.

Most U.S. markets will be closed for this week's Good Friday holiday though foreign exchange will remain open.

The euro was last down 0.70% on the day at $1.127, after last week reaching a three-year high at $1.1473.

Euro/dollar is one of the most overvalued currency pairs, showing that the single currency is acting as "the preferred channel for loss of confidence in the dollar," ING analysts Francesco Pesole and Benjamin Schroeder said in a note.

The shift from U.S. to European assets, combined with the diminished safe-haven appeal of the dollar, may continue to justify the euro's overvaluation, they added.

German investor morale in April posted its strongest decline since Russia invaded Ukraine in 2022 due to uncertainty unleashed by U.S. tariffs, data showed on Tuesday.

Euro zone banks also curbed firms' access to credit last quarter and expect to keep tightening credit standards due to increasing concerns about the economic outlook, the European Central Bank's lending survey showed.

The ECB is expected to cut rates by 25 basis points when it concludes its two-day meeting on Thursday.

The dollar gained 0.12% against the Japanese yen to 143.16 yen per dollar, not far off Friday's six-month low of 142.05.

Japan will seek full removal of additional tariffs imposed by Trump, its top negotiator, Ryosei Akazawa, said on Tuesday, ahead of his scheduled three-day visit to Washington.

The dollar gained 0.91% to 0.822 Swiss francs after slumping to a 10-year low against the Swiss currency last week.

Sterling was up 0.15% at $1.3209 after earlier reaching $1.3252, the highest since October 3.

The Australian dollar rose 0.32% to $0.6345 and the New Zealand dollar rose 0.39% to $0.5899 and earlier reached $0.5943, its highest since November 13.

In cryptocurrencies, bitcoin fell 0.52% to $84,436.

(Reporting by Karen Brettell; Additional reporting by Ankur Banerjee and Amanda Cooper; Editing by Shri Navaratnam, Kim Coghill, Joe Bavier, Giles Elgood, Franklin Paul and Sandra Maler)