The Trump team is brewing a "slimming down" of tariffs, the dollar plummets, and the outlook for Federal Reserve interest rate cuts changes!

According to the latest reports, the team of elected President Donald Trump is brewing a tariff plan targeting specific key imported products, which will cover all countries, although the specific affected industries or goods have not yet been disclosed. This strategy marks a significant reduction from the 10% to 20% universal tariff range advocated during Trump's campaign and has raised concerns among economists about rising consumer prices and distortions in global trade patterns.

Although the exact tariff targets have not surfaced, the market speculates that the Trump administration may focus on areas aimed at promoting the return of U.S. domestic industries, particularly in the defense industrial supply chain, such as key materials like steel, iron, aluminum, and copper, as well as critical medical supplies like syringes, needles, vials, and pharmaceutical materials. Additionally, according to informed sources, energy materials such as batteries, rare earth minerals, and solar panels may also become targets for tariffs.

This series of developments has quickly triggered a sharp reaction in the financial markets. The U.S. dollar index plummeted more than 1% after the news was released, falling to 107.86, significantly retreating from the two-year high of 109.54 reached on Thursday. As of the time of writing, the spot dollar index is down 0.9%, marking the largest single-day decline since November. U.S. stock index futures have expanded their gains, with Nasdaq futures rising over 2%.

In recent months, the market's expectations for large-scale tariff measures that Trump might adopt have put pressure on foreign currencies like the euro and prompted a significant appreciation of the dollar. However, Monday's market movements showed that the euro against the dollar rose 1.13%, reaching a weekly high of 1.0433 dollars.

In response, Lee Hardman, a senior foreign exchange strategist at Mitsubishi UFJ Financial Group, commented, "The market's initial reaction shows a certain sense of relief among investors." He further pointed out, "Perhaps the tariff increases implemented in the early stages of Trump's second term will be lower than previously feared by the market, leading to a reversal of the dollar's recent strength."

Other currencies also exhibited positive trends, with the British pound against the dollar rising 0.95% to 1.2542 dollars; the Australian dollar against the dollar climbing 1.13% to 0.6284 dollars; the offshore renminbi against the dollar increasing 0.5% to 7.3215; while the dollar against the Canadian dollar fell 0.96%.

Economists generally believe that widespread tariff measures will stimulate U.S. inflation, potentially limiting the Federal Reserve's flexibility to cut interest rates, keeping bond yields high, and supporting the dollar exchange rate.

However, if the tariff plan is limited to key areas such as the defense industrial supply chain, its impact on the global economy and U.S. inflationary pressures will be less than a plan that comprehensively covers imported products, indicating that the dollar still has room for depreciation.

Valentin Marinov, head of G10 foreign exchange strategy at Crédit Agricole, pointed out that if these plans are confirmed, "they may promote a recovery in risk sentiment and put pressure on the dollar," while the report "aligns with the Trump administration's stance of acting cautiously to avoid exacerbating inflation risks through aggressive universal tariffs."

It is worth noting that the so-called "universal tariff plan" that Trump is considering means that the plan will apply to all countries. Since Trump's victory in November, his proposed trade tariff threats have been a hot topic among investors and economic policymakers A comprehensive tariff plan could harm global economic growth and drive up consumer prices, especially if met with retaliation from other jurisdictions.

Meanwhile, investors are closely watching the U.S. non-farm payroll report for December, set to be released on Friday, for further insights into the Federal Reserve's interest rate cut prospects.

After the tariff report was released, traders increased their bets on U.S. monetary easing, expecting the Federal Reserve to cut rates by 42 basis points before 2025, up from the previous forecast of 38 basis points.

Jordan Rochester, Chief Macro Strategist at Mizuho, commented: "The latest reports reveal that a unified tariff plan may be a path considered by the new government. But the good news is that they seem intent on avoiding a uniform tariff on all imported goods to prevent a rapid spike in the Consumer Price Index (CPI)."

This week, several Federal Reserve policymakers will deliver speeches, and they may reiterate their colleagues' recent remarks that the battle against inflation has not yet been won. This series of policy dynamics and economic data releases will continue to provide the market with important clues about the future direction of the economy