The Japanese yen gave up some of the safe-haven driven gains on Tuesday as investors grappled with the potential implications of a Chinese startup's free open-source artificial intelligence model, while fresh tariff threats had the euro on the back foot.
The U.S. dollar steadied after it took a hit overnight amid a broad shakeout in financial markets on the emergence of China's DeepSeek free AI assistant that it says uses lower-cost chips and less data.
The new AI model threatens to upend widespread bets that in the past have lifted shares of U.S. technology stocks, especially chipmaker Nvidia (NVDA.O), triggering a sell-off in shares in a broad risk-off move.
The dollar was up 0.7% against the yen at 155.70 , putting the currency pair back within its recent trading range after the yen strengthened to its strongest level since mid-December at 153.715 on Monday amid the safe-haven bids.
"The fact that DeepSeek's AI news sparked more volatility for USD/JPY on Monday than the (Bank of Japan)'s hawkish meeting last Friday tells you how much of a big deal this is for traders," said Matt Simpson, senior market analyst at City Index.
"This clearly places the performance of the U.S. tech sector and appetite for risk under close watch, and incoming earning reports from Microsoft, Tesla, Meta Platforms and Apple under a magnifying glass," Simpson added.
The yield on benchmark 10-year Treasury note provided little respite for the dollar after it dropped to a one-month low of 4.561% on Monday as investors sought safer assets.
The euro fetched $1.0428, down 0.6% ahead of the European Central Bank policy meeting this week that is expected to cut interest rates as U.S. President Donald Trump talked up the threat of tariffs.
Trump said he plans to impose tariffs on imported computer chips, pharmaceuticals and steel in an effort to get the producers to make them in the United States.
That verbal salvo comes a day after the U.S. and Colombia pulled back from the brink of a trade war on Sunday after the White House said the South American nation had agreed to accept military aircraft carrying deported migrants.
"Tariffs will remain front and centre for the time being, ...especially as we close in on the February 1st deadline for the first round of tariffs," said Kieran Williams, head of Asia FX at InTouch Capital Markets.
Trump has flagged possible 25% duties on imports from Canada and Mexico on Feb. 1, and has threatened to hit the EU and China with tariffs as well.
Market players will be analysing whether or not newly confirmed U.S. Treasury Secretary Scott Bessent favours a gradual approach to tariffs, Williams said.
The dollar index , which measures the U.S. currency against six rivals the yen and the euro, rose 0.13% to 107.94, after dropping to its lowest level since mid-December on Monday at 107.68.
The Federal Reserve's two-day meeting begins on Tuesday where it's expected to keep interest rates steady. Investors will look for any hints on whether a rate cut could happen soon if inflation eases closer to the U.S. central bank’s 2% annual target.
For the Fed, the focus will be on Trump's early moves on broader policy that are likely to shape the economy this year.
Fed officials have already nodded to potential effects from Trump's trade, immigration and other policies, with staff at the December meeting penciling in assumptions for slightly slower growth, higher unemployment and little further progress on inflation for the coming year. i
Sterling last traded at $1.2441, down 0.4% on the day.
The risk-sensitive Australian and New Zealand dollars extended their losses.
Bitcoin , the world's best-known cryptocurrency, was little changed at $101,421, well off its record high of 109,071.86 touched last week on hopes Trump will usher in friendlier regulations.
