The US dollar rose sharply on Monday, hitting a three-week high after US President Donald Trump made good on his threat to impose more tariffs on trade. The move boosted demand for the dollar as a safe haven, amid growing concerns about the impact of the tariffs on the global economy.
Global Dollar Rise
The dollar rose significantly against the currencies affected by the tariffs. The most notable of these currencies was the Mexican peso, which rose 1.76% to 21.0423 pesos per dollar. The US dollar also rose against the Canadian dollar by 1.15% to 1.4691 Canadian dollars.
As for other currencies, the Chinese yuan was the least affected, with the dollar rising by 0.17% to 7.1988 Chinese yuan. However, the euro was the hardest hit, falling by 1.09% to 1.0248 dollars per euro, bringing it closer to parity. The shekel also fell 1% to NIS 0.2768 per dollar.
Tariffs Announcement
Over the weekend, President Trump announced tariffs of 25% on imports from Canada and Mexico, and 10% on imports from China, calling the measures necessary to combat illegal immigration and drug trafficking. The measures have sparked angry reactions from the three countries, who have vowed to retaliate, threatening to spark a new global trade war. This has renewed demand for the US dollar as a safe haven.
Impact of Tariffs on Markets
As economic tensions have increased, the Chinese yuan has fallen to a record low against the US dollar in overseas markets, while the Mexican peso has fallen to its lowest level in nearly three years. The Canadian dollar has also fallen to levels not seen since 2003.
Analysts at ING Bank have suggested that the Trump administration may be in favor of imposing tariffs first, in order to get the best trade deal as quickly as possible.
Forex Market Reaction
The foreign exchange market saw a defensive reaction from the dollar, with the US dollar index rising 1%. The currencies that were most affected were the commodity currencies, which benefit from global economic growth. Apart from the impact of these tariffs on global growth, there are expected to be inflationary effects for the US economy, which has made investors reduce their expectations for interest rate cuts by the Federal Reserve this year.
Euro weakens on tariff fears
The euro was hit hard by tariff fears. The euro fell against the US dollar by 1.1% to 1.0248, recording its lowest level since November 2022. These losses in the single European currency came on expectations that the European Union could be the target of upcoming US tariffs.
In an interview with the BBC, Trump indicated that imposing similar tariffs on the European Union “will definitely happen,” calling the trade deficit with the EU “atrocious.” This trade deficit, which amounted to more than $200 billion last year, reflects the worsening trade relationship between the United States and Europe.
German Economy and Its Implications for the Euro
Despite these concerns, some positive data from Germany helped the euro recover some of its losses. In January, Germany’s manufacturing sector saw a slight improvement, with the manufacturing PMI rising to 45.0 from 42.5 in December, its highest level since May last year. However, this figure is still well below the 50-point mark that separates growth from contraction.
The data also showed that the European Central Bank cut interest rates by a quarter of a percentage point earlier this week, its fifth cut since June. The decision came amid expectations that inflation has started to ease and that the European economy needs more support.
The US Dollar Rises Against Other Currencies
The US dollar has seen a notable rise against several other global currencies. The USD/CAD pair rose above the 1.4700 level for the first time since 2003. Similarly, the USD/MXN pair posted strong gains, rising to a near three-year high of 21.2951 before pulling back slightly.
US Economic Outlook
Alongside the impact of tariffs on the global economy. The US Federal Reserve is looking to address inflation that remains elevated in the US economy. Last week, the US central bank kept its benchmark interest rate at 4.25% to 4.50%. Officials noted that inflation has “made progress” toward its 2% target. But that there is still a lot of work to do to achieve that goal.
On the other hand, markets are considering that a rate cut may be postponed for now due to concerns about the impact of tariffs on the US economy. However, some analysts believe that Trump may continue to use this tactic as part of his trade policy to achieve the best international deals.
Yuan and the Chinese Economy Face Tariffs
In China, the Chinese currency (yuan) was significantly affected after the United States announced a 10% tariff on imports. This move was another threat to the Chinese economy, which relies heavily on exports. China considered this move unfair and threatened to take retaliatory measures.
Chinese data on the purchasing managers index also showed weak business activity in January. With the index reading not exceeding expectations. Although it was still in expansion territory. For investors, the problem is that the path to these tariffs is still unclear.
