The US Dollar weakened on Thursday, giving back some of the previous day's substantial gains after President Donald Trump backed off his threats to remove the Federal Reserve Chairman and appeared to ease his position on China.

The greenback also received a slight boost when Treasury Secretary Scott Bessent stated that the US did not have a specific currency target ahead of talks with his Japanese counterpart.

Bessent further noted that the current de facto trade embargo with China was unsustainable, though he cautioned that the US would not take the first step in reducing its over 100% tariffs on Chinese goods.

The Dollar has bounced back from a 3-and-a-half-year low of $1.1572 per Euro, but faced pressure as European trading picked up, with the single currency rising 0.5% to $1.1368, Reuters reports.

ING currency strategist Francesco Pesole pointed out in a note to clients that, by now, no other currency is as responsive to trade-related news as the Dollar.

“We still think the balance of risks remains skewed to the downside for USD in the near term, but we don't expect a repetition of the one-way traffic in Dollar selling we have witnessed of late,” he stated.

“That said, EUR/USD remains almost entirely a function of USD moves. And another leg higher above $1.15 remains possible should fears about the Fed's independence take centre stage again.”

Investors were shaken in recent days after President Trump launched a series of verbal attacks on Fed Chair Jerome Powell for hesitating to cut interest rates until economic data supported it.

The backlash against the Dollar has been so significant that, according to LSEG data, it is on track for its worst start to the year against a basket of currencies since the 1970s.

The Trump administration's apparent willingness to negotiate on tariffs, coupled with increased confidence in the Fed's independence, has provided investors with an opportunity to buy US assets.

However, Jan Hatzuis, chief economist at Goldman Sachs, believes the Dollar still has significant room to decline.

“A decision by non-US investors to reduce their US exposure would thus almost certainly result in significant Dollar depreciation,” according to Hatzuis in the Financial Times on Thursday.

“In fact, even reluctance by non-US investors to add to their US portfolios will probably weigh on the Dollar,” he added.

Furthermore, the Swiss Franc strengthened, trading at its highest level against the Dollar in over a decade, bolstered by strong safe-haven flows this month.

As a result, USD dropped 0.5% to 0.8268 Francs. The Yen also gained, pushing the Dollar down 0.6% to 142.68, while Sterling rose 0.3% to $1.3288. Meanwhile, China’s Yuan weakened slightly, trading at 7.2974 per Dollar.