President Donald Trump’s renewed pledges to slap 25% tariffs on imports from Canada and Mexico on Feb. 1 jolted foreign exchange markets late in the New York trading session, sending currencies from both countries plunging against the US dollar.
The Mexican peso slid 1.1% and Canada’s dollar fell as much as 1.2% after Trump told reporters at the White House he would follow through on trade restrictions, which he’d vowed during his inauguration, on Saturday. The Bloomberg Dollar Spot Index erased an early loss to gain as much as 0.2% and the yuan weakened 0.4%.
On Thursday, he indicated that he would proceed with tariffs on China, though he didn’t specify the levy.
“Continued US dollar strength is the path of least resistance as investors continue to grapple with the uncertain-but-persistent threat of increased tariffs,” said Nathan Thooft, a senior portfolio manager at Manulife Investment Management.
Traders in the $7.5-trillion-a-day foreign-exchange market have been on edge for weeks about the possibility of steep levies on US trade partners beyond Canada and Mexico. The US president has also raised the possibility of raising tariffs to imports from the European Union.
As investors waited for more details on Trump’s exact plans, the peso, loonie and yuan steadied in early Asia trading Friday.
Record Lows
The dollar has risen in large part because investors expect tariffs to bolster the greenback as greater price pressures keep US interest rates elevated. Uncertainty surrounding global trade could also support the dollar as traders seek safety in the world’s reserve currency.
The Canadian and Mexican currencies, meanwhile, had been hit by Trump’s threats.
The Canadian dollar lost about 6% against the greenback last quarter and touched the lowest since 2020 earlier this year. The currency may be dragged down even more, to the lowest in over two decades, if tariffs are 25%, pushing the Bank of Canada to lower interest-rates much further than planned, while pushing the economy into a deep recession.
The loonie may even get close to its all-time record low reached in 2002 in the aftermath of harsh levies and Canada measures in response, according to some strategists at Wall Street.
“Before the announcement the market was already braced for some upside US dollar versus Canadian dollar scenario but that view is now reinforced,” said Sarah Ying, head of FX strategy at CIBC Capital Markets “We don’t think its time to move against the crowd.”
Mexican assets, meanwhile, are bearing the brunt of the blow when it comes to emerging markets. Though the currency held up in January, 2024 was its worst year against the dollar since the global financial crisis as traders anticipated Trump’s return to the White House and amid local political noise.
A blanket tariff on Mexico would see the peso losing 10% of its value against the greenback, according to Deutsche Bank economist Francisco Campos. Money managers are also likely to ditch the nation’s dollar bonds, and expect shares of companies that export to the US to also post losses.
Trump also reiterated that China will end up paying tariffs, having previously floated a 10% measure against the nation in the days following his inauguration. With onshore Chinese markets closed for a holiday, the offshore yuan has fallen 0.6% this week.
The prospect of higher tariffs on Chinese goods along with a flailing economy have battered the yuan in recent months, weakening it close to a record low offshore. The managed currency has fallen more than 2% since Trump’s election in November.
Market Jitters
Trump’s remarks on Thursday also filtered through to the US rates market, where Treasury futures unwound some of their gains. After initially rising as much as 0.8% in late afternoon trading, the S&P 500 Index briefly erased gains before recovering to close 0.5% higher.
The brief leg down for the benchmark equities index was driven by declines in technology shares — a key segment of the market that depends on global trade — after investors have already been forced to reevaluate their thinking about investments tied to the artificial-intelligence boom.
Here’s what strategists and traders are saying:
Matthew Rowe, head of cross asset strategies at Nomura Capital Management
“The implementation of this action is both intrinsically inflationary and raises concerns about a broader trade war and decreased bi-lateral trade activity.”
“All things considered this is being viewed as encroaching on margins, creating friction to growth and demand, and bad for earnings growth.”
Jayati Bharadwaj, a strategist at TD Securities
“The currencies are moving, but there is a lot more to go. Unless some key sectors are exempted, this will be painful.”
“The US dollar will be stronger at the very least, even against other currencies like euro and CNY as markets start taking the threat seriously there.”
Helen Given, a foreign-exchange trader at Monex
“Should Trump double and triple down on this announcement — and keep these levies around for more than a few hours — we’ll see BBDXY extend gains and rise 1% through Monday morning’s open.”
Francisco Campos, an economist at Deutsche Bank
“I expect the Sheinbaum administration to rush and scramble to show ASAP some policy response regarding immigration and fentanyl. Also suspect they’ll reveal their list of retaliatory tariffs.”
Skylar Montgomery Koning, a currency strategist at Barclays Plc
“A 25% tariff on all imports from Canada would lead to a 19% CAD depreciation versus the dollar and very little of that is already priced in. The majority of the move we’ve seen in USD/CAD in recent months can be attributed to underperforming Canadian growth and corresponding relative dovishness from the BOC. That implies that USD/CAD has scope to rise above 1.60 if a 25% tariff is imposed.”
--With assistance from Edward Bolingbroke, Anya Andrianova, Michael O'Boyle, Jessica Menton, Cormac Mullen and Natalia Kniazhevich.
(Updates with latest moves and more context on China.)
