The US Dollar edged closer to a one-week low against key currencies on Tuesday as traders speculated whether President-elect Donald Trump's proposed tariffs would be less harsh than initially promised.

On Monday, the greenback weakened against the Euro and the Pound after a Washington Post report revealed that Trump's advisors were considering tariffs targeting only industries deemed crucial to US national security.

However, the currency regained some strength after Trump refuted the report in a post on his Truth Social platform. 

At the time of writing, the Dollar index, which measures the currency against six major peers, dropped by 0.25% to 108.03. This followed a dip to 107.74 overnight, marking its lowest point since 30th December.

On 2nd January, the index climbed to 109.58, its highest level since November 2022, driven primarily by expectations that Trump's proposed fiscal stimulus, regulatory cuts, and higher tariffs would stimulate US economic growth, Reuters reports.

“His (Trump's) 10-20% universal tariffs were always seen as unlikely to eventuate in such stringent form - so the reporting from the Washington Post has cemented this widely held view, even if Trump has played it down,” stated said Chris Weston, head of research at Pepperstone. 

“Clearly, the last thing Trump wants at this point is to lose his leverage and credibility going into negotiations ... even if the WaPo reporting becomes the reality over time.”

In addition, attention will also shift to US JOLTS job openings data and the ISM Services index for December later in the session. 

Furthermore, the eurozone has been a key focus of Trump's tariff threats, and the Euro gained 0.16% to $1.0407, after rising to a one-week high of $1.0437 on Monday.

“While Trump's rebuttal of the original article has curtailed the Euro/Dollar bounce, some doubt about the potential breadth of the tariffs could see an overbought dollar hand back a little more of its recent gains,” according to Chris Turner global head of markets at ING.

“We see no need to change our Euro/Dollar forecast profile of a gentle grind towards 1.02 this year,” he went on to say.

Markets are awaiting euro area inflation data later in the session, with some analysts predicting an increase to 2.5% year-on-year, up from 2.2% in the previous month.

“This (a possible hawkish market reaction to data) likely ends any residual hopes for 50 bps cut increments anytime soon and may further challenge the pricing of the pace of European Central Bank cuts in the first half of 2025,” stated Citi.

Moreover, the Pound gained 0.14% to $1.25395, after reaching a high of $1.2550 in the previous session.