The Japanese yen lost some of its safe-haven gains on Tuesday as investors tried to figure out the impact of a Chinese startup's free open-source AI model. Meanwhile, new tariff threats put the euro on the defensive.

The U.S. dollar stabilized after taking a hit overnight due to a market shakeup caused by the introduction of China's DeepSeek AI assistant, which claims to use cheaper chips and less data. 

This new AI model could disrupt the previous trends that boosted U.S. tech stocks, particularly chipmaker Nvidia, leading to a sell-off in a broader risk-averse environment.

The dollar rose 0.7% against the yen, reaching 155.70, bringing the currency pair back into its recent trading range after the yen had strengthened to its highest level since mid-December at 153.715 on Monday due to safe-haven demand. 

Matt Simpson, a senior market analyst at City Index, noted that the volatility in USD/JPY triggered by DeepSeek's AI news was more significant than the impact of the Bank of Japan's hawkish meeting last Friday, highlighting its importance for traders. 

The S&P 500 dropped 1.46% on Monday, primarily due to losses in tech stocks, with Nvidia plummeting 17% and wiping out about $593 billion in market value—the largest single-day loss for any company on Wall Street. 

Simpson added that this situation puts the performance of the U.S. tech sector and risk appetite under scrutiny, especially with upcoming earnings reports from Microsoft, Tesla, Meta Platforms, and Apple. The yield on the benchmark 10-year Treasury note didn’t offer much relief for the dollar, falling to a one-month low of 4.561% on Monday as investors flocked to safer assets. 

The euro traded at $1.0428, down 0.6%, ahead of the European Central Bank's policy meeting this week, which is expected to lower interest rates amid U.S. President Donald Trump's comments about tariff threats.

Trump announced his intention to impose tariffs on imported computer chips, pharmaceuticals, and steel to encourage production within the United States. This statement came just a day after the U.S. and Colombia managed to avoid a trade war, with Colombia agreeing to accept military flights for deported migrants. 

"Tariffs are going to be a major focus for now, especially as we approach the February 1st deadline for the initial round of tariffs," noted Kieran Williams, head of Asia FX at InTouch Capital Markets. Trump has hinted at potential 25% tariffs on imports from Canada and Mexico starting February 1, and he has also threatened to impose tariffs on the EU and China.

Market participants are keen to see if the newly confirmed U.S. Treasury Secretary Scott Bessent will advocate for a gradual tariff approach, according to Williams. The dollar index, which tracks the U.S. dollar against six other currencies including the yen and euro, increased by 0.13% to 107.94 after hitting its lowest point since mid-December at 107.68.

The Federal Reserve's two-day meeting kicks off on Tuesday, where it's anticipated they will maintain current interest rates. Investors will be on the lookout for any signals regarding a potential rate cut if inflation trends closer to the Fed's 2% annual target. 

The Fed is particularly interested in how Trump's early policy decisions might influence the economy this year. Officials have already acknowledged the possible impacts of Trump's trade and immigration policies, with projections from the December meeting suggesting slightly slower growth, increased unemployment, and minimal progress on inflation for the upcoming year. 

The British pound was last seen at $1.2441, down 0.4% for the day, while the risk-sensitive Australian and New Zealand dollars continued to decline.

Bitcoin, the most famous cryptocurrency out there, stayed pretty steady at $101,421, which is quite a bit below its all-time high of 109,071.86 reached last week, fueled by optimism that Trump might bring in more favorable regulations.