Tariff Tensions Drive US Dollar Up; Australian Dollar and Yuan Fall

Image Credit: Reuters

The U.S. dollar gained ground on Tuesday as new tariffs on Chinese goods went into effect, sparking swift retaliation from Beijing and causing the Chinese yuan and Australian dollar to slump. The Canadian dollar and Mexican peso also weakened, despite having earlier avoided U.S. tariff hikes. The euro dropped, as the European Union found itself caught in Washington's trade disputes.

President Donald Trump’s administration imposed an additional 10% tariff on Chinese imports starting at 12:01 a.m. ET on Tuesday. In response, China announced tariffs that will take effect on February 10, targeting American cars, farm equipment, and energy shipments.

This escalation reignited concerns over a prolonged global trade war, which had seemed to ease after Trump reached last-minute agreements with Canada and Mexico. According to Gary Ng, senior economist at Natixis, the chances of a quick deal between the U.S. and China now seem uncertain. Even if some agreements are made, tariffs may continue to be a tool used repeatedly, leading to market volatility.

The Chinese yuan weakened by about 0.3% to 7.3213 per dollar in offshore trading, though it was off the record low of 7.3765 yuan reached overnight. With mainland markets closed for Lunar New Year holidays, the yuan won't officially trade until Wednesday.

The Australian dollar, often viewed as a proxy for the yuan, dropped by 0.7% to $0.6186, though it remained above Monday's low of $0.60886, the weakest level in nearly five months.

Despite a brief rebound after Canada and Mexico negotiated tariff reprieves by agreeing to increase border enforcement, the loonie fell by 0.4% to C$1.4485 against the U.S. dollar. The peso also weakened by 0.4% to 20.4100 per dollar, but remained above the previous session’s low of 21.1882.

TD Securities analysts warned that while risk sentiment improved following the tariff reprieve, trade concerns may resurface if no progress is made toward a lasting deal by month’s end. They also noted that the uncertainty surrounding trade could keep a risk premium on currency exchanges.

TD expects the USDCAD pair to rise to C$1.50 by the end of March, citing Canada’s weak macroeconomic outlook and ongoing trade uncertainty.

The euro dropped 0.4% to $1.0297, after bouncing back from a low of $1.0125 on Monday, while the British pound declined 0.4% to $1.24047, despite Trump suggesting Britain might avoid tariffs. The U.S. dollar also gained 0.3% to 155.24 yen.

 

 

 

 

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