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Trump throws some cold water on the zooming dollar

In a possible sign that the so-called Trump trade may be unraveling, the U.S. dollar is wavering and analysts are less certain of where it will go.

The U.S. dollar index hit a one-month low Thursday after President-elect Donald Trump disappointed investors in a Wednesday press conference. Rather than discussing infrastructure spending, deregulation or tax cuts, Trump emphasized a tough position on trade and a border tax.

"The market had priced in a very positive scenario of Trump: fiscal policy without trade protectionism," said Athanasios Vamvakidis, a European currency strategist in Europe for Bank of America Merrill Lynch.

"That's why the press conference is a scare," he said, noting that traders are now focused on the dollar and what the new administration does after next Friday's inauguration.

US dollar index three-month performance

Source: FactSet

Stocks also fell, and some traders began talking about the reversal of a Trump rally that has seen stocks climb to records, Treasury yields jump to multi-year highs, and the U.S. dollar index hit a 14-year high.

While many analysts note that those moves started ahead of election and won't likely be easily derailed, Trump's comments Wednesday threw a wrinkle into those one-way trades.

"Right now, there's just a huge amount of information feeding into markets, and it's very difficult to understand what the consensus thinking is going to be," said Andres Jaime, global FX and rates strategist at Barclays,

"At any point, you could get a tweet that could move markets. Everyone is so nervous about it," he said.

Trade worries began to surface early this year, hitting the Mexican peso in particular as Trump praised automakers on Twitter and in his Wednesday speech for their plans to reduce planned expansion to Mexico.

UBS in a Thursday note said that the dollar would likely peak in the next few months.

In addition to likely disappointment around Trump policies, "we think it's a broad-based recovery of all other currencies relative to the U.S. dollar," said Thomas Flury, global head currency strategy at UBS Chief Investment Office.

He expects rising inflation and a more restrictive monetary policy in Europe to support the euro, while stabilizing oil prices should help oil producing countries such as Canada see strength in their currencies versus the dollar this year.

The Trump administration may also prefer a softer U.S. dollar.

"Definitely, Trump has been emphasizing export-oriented policies. This is not consistent with a strong dollar," Vamvakidis said. Dollar strength makes U.S-produced goods more expensive for foreign buyers.

The U.S. dollar index is tracking for its third negative week in four after hitting a 14-year high at the start of the year.

"I don't think it's a change of the trend. For now we have to wait to see what Trump is going to do in the months ahead," Vamvakidis said. He said the dollar's decline this week was "not surprising and definitely not a major setback for the dollar rally."

Bank of America forecasts the euro to weaken to $1.02 versus the dollar by the middle of this year, and the yen to weaken to 120 yen versus the dollar by the end of the year.

Barclays' Jaime generally expects the dollar to strengthen against other major world currencies, such as the Japanese yen. "If the next rally of the dollar comes from restrictive trade policy, we think [emerging market currencies] would be the one that comes under pressure," he said.