(Bloomberg) -- The dollar surged, oil jumped and equity markets turned red after US President Donald Trump made good on his threat to impose tariffs on the exports of Canada, Mexico and China.
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The yields on 2-year US Treasuries rose while European and US stock futures slumped, and an index of Asia-Pacific shares also dropped in response to the punitive measures taken against some of America’s biggest trading partners. The Canadian dollar sank to its weakest since 2003, while the euro extended its decline after Trump said tariffs on EU goods would “definitely happen.”
The rapid escalation in tensions constitutes the most extensive act of protectionism taken by a US president in almost a century and triggered a selloff across asset classes, given its knock-on effect on everything from inflation rates to geopolitics and economic growth. While Trump long pledged sweeping trade levies to combat issues such as illegal immigration, some had anticipated tariffs would be delayed or avoided as officials sought to negotiate deals.
“The market needs to structurally and significantly reprice the trade war risk premium,” George Saravelos, head of FX research at Deutsche Bank, wrote. “For Canada and Mexico, we see this trade shock - if sustained - as being far larger in economic magnitude than that of Brexit on the UK.”
Behind the rally in the dollar is the bet that tariffs will fuel inflationary pressures and keep US interest rates elevated, while also hurting foreign economies more than the US and adding to the greenback’s safe-haven lure. Foreign currencies get hurt as American demand declines for costlier imports.
Traders are on alert for big swings in stock markets in sectors that are considered the front lines of any trade war. For foreign exchange traders, the fix on China’s yuan will be key for signs of how much officials will try to slow its decline. The Mexican peso also posted losses.
In response to the US announcement, Canadian Prime Minister Justin Trudeau unveiled a 25% counter-tariff, while Mexican leader Claudia Sheinbaum pledged retaliatory levies. China’s Commerce Ministry issued a statement vowing “corresponding countermeasures,” without elaborating, and vowed to file a complaint to the World Trade Organization.