The Canadian dollar and Mexican peso slumped on Tuesday after President-elect Donald Trump said he would impose tariffs on products from Canada, Mexico and China, sparking volatility as investors braced for trade spats.
In an initial knee-jerk reaction to Trump’s comments, the dollar jumped more than 2% against the peso but was last up 0.95% after the moves moderated.
The dollar hit a 4-1/2-year high against its Canadian counterpart, rising more than 1.5%, and was last up 0.78% at C$1.4095. The U.S. currency also rose to its highest since July 30 against China’s yuan .
The greenback had spent the previous couple of days on the back foot as U.S. Treasury markets cheered Trump’s pick of hedge fund manager Scott Bessent as U.S. Treasury Secretary, causing government bonds to rally and yields to fall, weighing on the currency.
Yet Trump halted that momentum when he said that on his first day in office, he would impose a 25% tariff on all products from Mexico and Canada.
On China, the president-elect said Beijing was not taking strong enough action to curb the export of ingredients used in illicit drugs, floating “an additional 10% tariff, above any additional tariffs, on all of their many products coming into the United States of America”.
“I think we had a perfect example last night of why volatility is more likely under Trump,” said Jane Foley, head of FX strategy at Rabobank.
“He can just put out a comment like that outside of usual U.S. market hours that takes people by surprise. It leaves investors, everybody scrambling to work out what this really means.”
Currencies bounced around as markets digested Trump’s comments, with the euro falling around 0.3% before rebounding to trade the same amount higher at $1.0526.
The Japanese yen rallied as U.S. traders came in for the day, with the dollar last down 0.65% at 153.15 yen.
Erik Nelson, macro strategist at Wells Fargo, said some investors may have been buying the euro to close their previous bets against the euro-Canadian dollar currency pair, which some had seen as a “Trump trade” in the belief Europe would be hit harder by tariffs than Canada.
The rally in the yen puzzled analysts although Neil Jones, managing director for FX sales and trading at TJM Europe, said some investors were likely rebalancing their portfolios before the end of the month, which could accentuate moves.
Ben Bennett, Asia-Pacific investment strategist at Legal And General Investment Management, said investors have so far focused on market-positive Trump policies like tax cuts and deregulation, but that it is arguably quicker for him to implement more challenging policies such as higher tariffs.
“This announcement serves as a wake up call,” he said. “Tariffs should be good for the U.S. dollar and bad for currencies that are being tariffed as trade balances shift, but I’m not sure Trump’s government will be happy to let that trade accelerate.”
The Australian dollar sank to a more than three-month low of $0.6434 in early Asian trading but was last down just 0.1% at $0.65. The Aussie is often sold as a liquid proxy for the yuan given China is Australia’s biggest trading partner.
In cryptocurrencies, bitcoin was trading at $92,711, well below the record high of $99,830 it touched last week.
Bitcoin met profit-taking ahead of the symbolic $100,000 barrier, having climbed more than 40% since the U.S. election on expectations Trump will loosen the regulatory environment for cryptocurrencies.
(Reporting by Harry Robertson in London and Ankur Banerjee in Singapore, additional reporting by Summer Zhen in Hong Kong; Editing by Bernadette Baum, Kirsten Donovan)
