Investing.com – The U.S. dollar rose higher on Tuesday, while the Canadian dollar, Mexican peso and Chinese yuan fell lower after President-elect Donald Trump raised the specter of a trade war at the start of his new term.
At 04:50 ET (09:50 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, was trading 0.1% higher at 106.840, nearing last week’s two-year peak.
Dollar gains from tariff talks
Trump took to his Truth Social platform late Monday to threaten 25% tariffs on Mexico and Canada if they don’t better control their borders.
President-elect Trump also threatened an additional 10% tariff on all Chinese imports upon taking office on January 20, adding that he would impose the tariffs until Beijing reduces the flow of illegal drugs, particularly fentanyl, into the United States would stop.
“While most market participants assume that Trump will use tariffs as a big bargaining stick – in this case to tighten US border controls – we would be cautious about dismissing their market impact as anything major,” ING analysts said in a note . .
“If 25% tariffs were to see the light of day in Mexico, that would be a 24/25 story, not just 21. We already think the currencies of Mexico and Canada will have a tougher Trump 2.0 than during his first term . .”
These currencies have already been hit hard, with USD/MXN up 0.9% to 1.4106 and 1.4% to 20.5738.
“These policies are generally positive for the dollar. Although the final outcome of the tariff threat may be less severe once negotiations are concluded,” ING added.
Elsewhere, the Federal Reserve will announce a quarter-point cut in interest rates later in its meeting in early November.
The Fed began cutting rates after gaining confidence that inflation would continue to fall, but inflation’s progress toward the 2% target appears to have slowed.
Euro stable, for now
In Europe, the currency rose 0.1% to 1.0507, but the common currency remains under pressure, after hitting a two-year low last week, as the European economic outlook continues to look difficult, especially if Donald Trump starts a global trade war.
“The fact that Europe was not mentioned in Trump’s first tariff post might be welcome news on the continent. However, local policymakers will remain concerned that it will only be a matter of time before Trump turns his attention to the European auto sector or tariffs more broadly,” ING said.
“In any case, the threat of further tariffs on China shows the direction of global trade, which is bearish for the euro.”
Rates have already been cut three times this year and investors now see a 50% chance that rates will be cut by 50 basis points on December 12 instead of the usual 25, given weak growth and rising recession risks.
was trading flat at 1.2568, just above last week’s six-week low on Friday, as economic weakness points to a greater likelihood of rate cuts from the .
Trump’s comments carry weight
fell 0.2% to 7.2546, with the Chinese currency falling to its weakest level in almost four months after Trump’s comments on possible tariffs, but still holding up better than other currencies mentioned.
“At ING, we believe that the Chinese authorities are playing the long game here and will not devalue the renminbi for some short-term gain for local exporters,” ING said.
fell 0.2% to 153.95, with the Japanese yen benefiting as traders looked for safe havens amid renewed trade tensions.
