US Dollar Index gives up some gains, outlook remains firm as US Trump starts trade war

• The USD Index retraces after failing to revisit 110.00 but is still 0.7% higher intraday.
• US President Trump imposed 25% tariffs on Canada and Mexico, and 10% on China.
• Investors expect Trump's tariffs would be inflationary for the US economy.

The US Dollar (USD) surrenders some of its intraday gains in Monday's North American session, with the US Dollar Index (DXY), which tracks the Greenback's value against six major currencies, dropping to near 109.20 after posting a fresh two-week high near 109.90.

The Greenback strengthened after United States (US) President Donald Trump imposed 25% tariffs on Canada and Mexico, and 10% on China. He also left the door open for tariffs on the Eurozone but didn't provide much information. This scenario uplifted the US Dollar by increasing its safe-haven appeal.

Donald Trump had been warning that his North American peers and China could face hefty tariffs for allowing illegal immigrants and the deadly opioid fentanyl enter into the economy.

Market participants expect the imposition of bulky tariffs would lead to a global trade war. Such a scenario will be inflationary for the US economy, which would force the Federal Reserve (Fed) to maintain a restrictive monetary policy stance for longer.

Last week, the Fed left its key borrowing rates steady in the range of 4.25%-4.50% as officials were worried about stalling progress in the disinflation trend toward the central bank's target of 2%. Fed Chair Jerome Powell guided that monetary policy adjustments would become appropriate only when they see "real progress in inflation or at least some weakness in the labor market".

Going forward, investors will focus on the US ISM Manufacturing PMI data for January, which will be published at 15:00 GMT. The Manufacturing PMI is expected to come in at 49.8, slightly higher from 49.3 in December, but still will be below the 50.0 threshold that separates expansion from contraction.