Dollar Strengthens Following Trump's Tariff Talk on Canada and Mexico

By Wayne Cole

In Asian trading on Tuesday, the dollar saw a rebound amidst fluctuating activity, following comments from U.S. President Donald Trump regarding potential tariffs on Canada and Mexico. The remarks hinted at the possibility of tariffs reaching as high as 25%, though no specific details were provided.

Trump indicated that his team was contemplating these tariffs, which could be revealed as early as February 1. This unexpected announcement startled the market, especially since officials had earlier pointed towards a cautious approach to any new tariffs, which had given some relief to currencies sensitive to trade.

The abrupt mention of a 25% tariff had immediate effects, as many in the market reacted swiftly. Shoki Omori, chief global desk strategist at Mizuho Securities in Tokyo, noted, "A 25% is steep to begin with, and the markets shifted rapidly, particularly in the foreign exchange segments." He mentioned that many had anticipated Trump would initially target China with more moderate tariffs of around 10-20% before potentially escalating.

The initial market response included a sharp decline in both the Canadian dollar and the Mexican peso, which in turn aided the dollar in regaining some of the lost ground from the previous day. Specifically, the dollar rose by 1.2% against the Canadian dollar, bringing it to 1.4475, and gained 1.3% against the peso.

Additionally, the dollar increased by 0.6% to 108.65 yen, bouncing back after a significant drop of 1.2% the prior day, marking the largest single-day loss since late 2023.

The euro also saw a decline, trading down to $1.0364 after reaching a peak of $1.0434 earlier. Since the European Union typically runs a significant trade surplus with the United States, it has been perceived as a primary target for potential tariffs from Trump.

Moreover, the dollar expanded by 0.3% relative to the Japanese yen to 156.06, recovering from an earlier five-week low of 154.90. The yen had previously benefitted from increased expectations that the Bank of Japan might raise interest rates at its policy meeting forthcoming this Friday.

Overall, the dollar exhibited resilience and gained 0.3% against its offshore Chinese counterparts, reaching 7.2847, amid past threats from Trump regarding tariffs that could exceed 60% for China.

Dollar, Tariffs, Trade