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Broader markets remain on edge after DeepSeek's AI launch

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Trump's tariff threats hit euro

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US dollar steadies as FOMC meeting begins on Tuesday

By Brigid Riley

TOKYO, Jan 28 (Reuters) - 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 ), 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.

The benchmark S&P 500 lost 1.46% on Monday, dragged

down by technology stocks. AI leader Nvidia ( NVDA ) sank 17%, and it

erased about $593 billion in stock market value, the largest

single-day loss for any firm on Wall Street.

"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.