Trump’s Tariff Threats Spark Currency Turmoil, Raising Specter of Trade Wars
President-elect Donald Trump’s renewed commitment to imposing tariffs on goods from Canada, Mexico, and China sent shockwaves through global currency markets, depreciating the targeted nations’ currencies against the US dollar and raising concerns about potential trade wars. Trump’s pronouncements, made late Monday, included a 25% tariff on all imports from Canada and Mexico and a potential additional 10% tariff on Chinese goods, citing concerns about illicit drug precursors. This aggressive stance, reminiscent of his first term’s trade policies, including the renegotiation of NAFTA, injected uncertainty into currency markets already thinned by the upcoming Thanksgiving holiday.
The Mexican peso suffered the most significant blow, plummeting over 2.5% against the dollar to reach its lowest point since July 2022, surpassing even the post-election dip following Trump’s victory. Analysts like Juan Perez of Monex USA warn that the peso remains vulnerable to further declines, potentially revisiting multi-year lows. The market reaction, however, is anticipated to fully materialize after the holiday season. Mexican President Claudia Sheinbaum responded with a warning of severe economic repercussions for both countries and hinted at potential retaliatory measures.
The Canadian dollar also experienced downward pressure, reaching a 4-1/2-year low against the US dollar, though its decline was less pronounced than the peso’s. Shaun Osborne of Scotiabank noted the Canadian dollar’s relative stability compared to the peso, attributing the difference in impact to the specific nature of the tariff threats. The Chinese yuan, while not as drastically affected as the North American currencies, also depreciated against the dollar, reaching its lowest level since late July.
Market experts point to Trump’s unpredictable policy pronouncements as a significant source of volatility. Jane Foley of Rabobank highlighted the unexpected nature of Trump’s comments, made outside regular market hours, as a prime example of the heightened market uncertainty expected under his leadership. These pronouncements force investors to scramble to interpret their implications, contributing to increased volatility.
While the tariff news dominated currency markets, other factors also played a role. The US dollar’s performance was mixed, following a previous dip after Trump’s appointment of Scott Bessent as Treasury secretary. Against the Japanese yen and the euro, the dollar weakened slightly. The Federal Reserve’s November meeting minutes, released Tuesday, revealed a consensus among policymakers to gradually ease policy restraint, contributing to a slight recovery in the yen and euro against the dollar. The upcoming release of the October Personal Consumption Expenditures price index is expected to provide further direction to the currency markets.
Analysts caution that while the immediate tariff threats were directed at Canada, Mexico, and China, other trading partners, particularly the European Union, may not be immune. Trump’s past criticisms of Europe’s trade relationship with the US suggest potential future trade tensions. Shaun Osborne emphasizes that the risk of tariff actions against other regions, particularly Europe, remains tangible given Trump’s known dissatisfaction with existing trade agreements.
The tariff news also influenced safe-haven currencies, with the Japanese yen benefiting from the increased market uncertainty. Juan Perez suggests that while not always directly beneficial to Japan, trade turbulence involving China can create opportunities for Japan to assert its leadership within Asia. The Australian dollar, often seen as a proxy for the Chinese yuan due to Australia’s close trade ties with China, also experienced a sharp decline, reaching a three-month low.
Finally, the cryptocurrency market, which had experienced a recent surge fuelled by expectations of a deregulatory environment under Trump, saw a slight correction. Bitcoin, which had recently reached a record high, retreated from the symbolic $100,000 mark, indicating a period of profit-taking after its significant post-election rally. The cryptocurrency market remains sensitive to regulatory developments and overall market sentiment.
