USD: US Dollar surges on Trump's tariffs

The US Dollar (USD) surged on Monday, pushing its Canadian counterpart and the Mexican peso to multi-year lows while China’s yuan slumped to a record trough in offshore trade after U.S. President Donald Trump’s tariffs kicked off a trade war.

The U.S. dollar’s gains were broad, with the euro also touching a more than two-year low and the Swiss franc – despite typically acting as a safe haven – initially sliding to the weakest since May.

As Trump had promised last month, the U.S. slapped Canada and Mexico with duties of 25% and China with a 10% levy at the weekend, calling them necessary to curb immigration and narcotics trafficking.

The tariffs are due to take effect at 12:01 a.m. ET (0501 GMT) on Tuesday.

Canada and Mexico, the top two US trading partners, immediately vowed retaliatory measures, and China said it would challenge Trump’s levies at the World Trade Organization.

“The surprise for markets … is that Canada and Mexico retaliated immediately and that others, i.e. China and the EU, may follow their lead, resulting in a sharp contraction in global trade,” said Tony Sycamore, a market analyst at IG.

“The starting date of U.S. tariffs on Canada, Mexico and China of Feb. 4 was also much sooner than many had anticipated.”

The tariffs are widely expected to push up U.S. inflation, supporting the dollar by keeping US interest rates higher for longer.

Markets pared expectations of rate cuts from the Federal Reserve in the wake of the tariff news, with futures pricing in just a 50% chance of two cuts this year .

The US Dollar advanced 0.36% to 7.3404 yuan in the offshore market , having earlier pushed to a record high of 7.3765 yuan. Markets in China remain closed for the Lunar New Year and will resume trading on Wednesday.

The Mexican peso fell to its lowest in nearly three years at 21.2882 per U.S. dollar and was last down 1.5% at 20.9870, while the Canadian dollar slumped to 1.4792 per U.S. dollar, a level not seen since 2003. The Canadian dollar was last 0.88% weaker at 1.46775 per U.S. dollar.

Canada and Mexico’s economies are at risk of recession, some analysts reckon, while the euro zone economy faces further stagnation if tariffs kick in.

The Australian dollar hit a five-year low, while the New Zealand dollar fell to its lowest since October 2022. The two Antipodean currencies are often used as liquid proxies for the Chinese yuan.

“Investors will be on tenterhooks to see whether any phone conversation today between President Trump and his counterparts in Canada and Mexico can yield any results in 24 hours,” said Chris Turner, global head of markets at ING.

“The FX market will then be looking at the fallout on equity markets. For example, do U.S. equities fall enough to re-price a more dovish Fed easing cycle?”

US equity futures pointed lower on Monday.

The euro plunged as much as 2.3% to $1.0125 – the lowest since November 2022 – as investors braced for tariffs on Europe from the Trump administration. The single currency was last down 0.9% at $1.027.

Trump said over the weekend that tariffs on the European Union would go ahead, but did not say when.

The greenback added as much as 1.1% to 0.9210 per Swiss franc , the highest since last May, before trading at 0.91455 franc. Sterling fell 0.43% to $1.2342.

Japan’s yen , conversely, was resilient, with the dollar sliding 0.45% against the yen to 154.495.

That left the dollar index , (.DXY), which measures the U.S. currency against six other units, at 109.15. It had touched a three-week high of 109.88 in early trading.

Bitcoin was at $95,521, sliding back below $100,000 to its weakest in nearly three weeks. Ether fell sharply to its lowest since early November and was last at $2,621.62.