Trump's Trade War Sparks Dollar Surge, Weighs on Global Currencies

Image Credit: Reuters

The U.S. dollar surged on Monday, driving the Canadian dollar and Mexican peso to multi-year lows, while the Chinese yuan hit an all-time low in offshore trading following President Donald Trump’s announcement of sweeping tariffs. The dollar’s gains were widespread, with the euro dropping to a more than two-year low, and the Swiss franc, typically a safe haven, falling to its weakest point since May.

Canada and Mexico, the U.S.’s top two trading partners, swiftly announced retaliatory actions, while China vowed to challenge the tariffs at the World Trade Organization. 

"The surprise for markets... is that Canada and Mexico retaliated immediately, and others like China and the EU might follow suit, leading to a sharp contraction in global trade," said Tony Sycamore, an analyst at IG. He also noted the tariffs’ effective start date on February 4 was much earlier than expected.

Trump’s tariffs, which impose 25% duties on Canada and Mexico and 10% on China, were framed as necessary actions to combat illegal immigration and drug trafficking.

Mansoor Mohi-uddin, chief economist at Bank of Singapore, highlighted that Trump’s swift actions early in his term would likely dent investor confidence. Most had expected the tariffs to be a threat only later in 2025 after extended negotiations with trading partners.

The dollar gained 0.4%, pushing the yuan to 7.3462 in offshore markets, even briefly hitting a record 7.3765. With markets in China closed for the Lunar New Year, trading will resume Wednesday.

Saxo’s John Hardy warned that if these tariff actions continue, it could signal a trade war with significant consequences, including weak growth, high inflation, and disruptions to supply chains. The longer-term risk could be stagflation—weak economic growth combined with rising inflation.

The Mexican peso fell to its lowest level in nearly three years at 21.2882 per U.S. dollar, while the Canadian dollar dropped to C$1.4755, its weakest since 2003. The Australian dollar fell to a five-year low, and the New Zealand dollar slid to its lowest since October 2022.

The euro dropped as much as 2.3% to $1.0125, as traders braced for potential U.S. tariffs on Europe. The greenback also gained 1.1% against the Swiss franc, reaching its highest since May, and sterling fell 1%. Japan’s yen showed resilience, slipping only slightly to 155.59 per dollar.

As a result, the U.S. Dollar Index, which tracks the greenback against six major currencies, rose by 0.11%, reaching 109.65, a three-week high.

On the economic front, U.S. Personal Consumption Expenditures (PCE) data for last month showed a 0.3% rise, the biggest increase since April, amid a surge in consumer spending. This data suggests the Federal Reserve is unlikely to rush into rate cuts.

Meanwhile, Bitcoin dropped to $92,871, slipping below $100,000 to its lowest in nearly three weeks, and Ether fell sharply to $2,475.25, its lowest since early November.

 

 

Paraphrasing text from "Reuters" all rights reserved by the original author.