Trump’s Tariff Bombshell: Dollar Soars as Stocks Plummet

The dollar surged on Tuesday following a vow by U.S. President-elect Donald Trump to impose tariffs on all imports from Canada and Mexico, along with additional tariffs on China

By Sheenu Gupta On Nov 26, 2024 Share with new partner:

On Tuesday, the dollar saw a sharp increase after U.S. President-elect Donald Trump announced his intention to impose tariffs on all imports from Canada and Mexico, as well as additional tariffs on goods from China. This pledge led to a significant market reaction, with the dollar strengthening as traders responded to the anticipated economic impact of these trade measures.

Meanwhile, stocks took a step back, reversing some of the strong gains made in the previous session. The earlier rally had been fueled by optimism surrounding the nomination of fund manager Scott Bessent for the position of Treasury Secretary. Investors viewed Bessent’s nomination as a positive development, believing that he could act as a voice for Wall Street within the U.S. government. However, on Tuesday, stocks retraced some of those gains as the focus shifted to the potential ramifications of Trump’s tariff proposals.

Bessent’s nomination had initially triggered a notable drop in U.S. Treasury yields, as investors flocked to purchase government bonds, which in turn caused the dollar to weaken during the previous session. The market had interpreted Bessent’s appointment as a sign that he would help temper some of President-elect Trump’s more aggressive economic policies, particularly those concerning trade. However, on Tuesday, analysts saw a reversal, with Trump’s recent tariff announcement seeming to reassert his control over market expectations.

Matt Simpson, a senior market analyst at City Index, commented on the situation, noting that Trump’s actions appeared to be a reminder to the market of his influence, especially after the Bessent nomination had raised hopes of a more moderate stance. Simpson added that with the Canadian dollar strengthening against the Mexican peso, markets were speculating that Mexico would bear the brunt of the tariff impacts, while Canada might fare somewhat better.

As a result of these developments, the dollar saw a sharp increase, rising by 1.6% to 20.6000 Mexican pesos at 0213 GMT on Tuesday. The U.S. currency also gained 1% against the Canadian dollar, climbing to C$1.4132.

The U.S. dollar strengthened slightly by 0.2% to 7.2628 yuan in offshore trading on Tuesday, after earlier reaching a high of 7.2730 yuan, its strongest level since late July. This rise was largely driven by the market’s reaction to President-elect Donald Trump’s recent tariff announcements.

Meanwhile, Australia’s dollar, which is often sensitive to changes in China’s economic outlook due to its close trading ties with the country, fell by 0.5% to $0.6474. Earlier in the day, it had dropped to $0.64335, marking its lowest point since August 5. The decline in the Australian dollar reflected broader concerns about the economic impact of the tariffs, particularly on trade with China.

Sean Callow, a senior FX analyst at ITC Markets, noted that Trump’s comments should not have come as a major surprise, given that just last month, Trump had publicly stated that “the most beautiful word in the dictionary is tariff.” According to Callow, the only real surprise was the timing of Trump’s remarks, rather than the intention to implement tariffs, which had been anticipated by the markets.

The decline in currencies sensitive to trade has been expected and is likely to continue in the short term. In Japan, the Nikkei index dropped by 1.2%, reversing most of the previous day’s gains, as investors assessed the potential impact of tariffs on the country’s major exports, especially the automotive sector. Both Toyota and Nissan saw significant losses, with Toyota falling by 2% and Nissan plunging by 4%.

In Australia, the stock market also faced a setback, with the benchmark index easing by 0.46%, following its record high just the day before. Meanwhile, Taiwan’s stock index dropped by 0.8%, reflecting broader concerns in the region about the effects of the escalating trade tensions.

In contrast to the declines in other markets, Hong Kong’s Hang Seng index rose by 0.6%, and mainland China’s blue-chip stocks gained 0.2%, recovering from earlier losses.

President-elect Donald Trump announced that on his first day in office, he would implement a 25% tariff on all goods imported from Mexico and Canada, as well as an additional 10% tariff on Chinese products. He justified these measures by citing concerns over illegal immigration and the trade of illicit drugs. Trump has also previously stated his intention to revoke China’s most-favored-nation trade status and impose tariffs on Chinese imports that could exceed 60%.

Gary Ng, a senior economist at Natixis, noted that President-elect Trump’s tariff announcement has undoubtedly shocked the market, especially impacting Chinese assets and export sectors. However, he pointed out that while the tariff on Chinese goods is significant, it is not as severe as the measures aimed at Mexico and Canada. As a result, investors may choose to wait for further details on the implementation of these tariffs and whether the promised 60% tariff on China will come to fruition.

Meanwhile, U.S. S&P 500 futures pointed down 0.1% after the index had gained 0.3% in regular trading. In Europe, pan-European STOXX 50 futures fell by 1%, reflecting the broader global market uncertainty. The euro weakened by 0.4%, dropping to $1.0459, while the British pound lost 0.34%, settling at $1.2527.

The dollar also slipped slightly by 0.1% to 154.04 yen, after initially rising in response to Trump’s tariff statements. The dollar-yen pair tends to follow long-term U.S. Treasury yields, which had risen by about 2 basis points to 4.2809% in Tokyo, although this followed a 15 basis-point decline the previous day.

Gold prices were pressured by the dollar’s strength, falling to a one-week low of $2,604.99 per ounce. On the other hand, Bitcoin experienced a 1% increase, reaching $94,610, as it regained some ground after last week’s pullback from its record high of $99,830. The cryptocurrency market has been buoyed by speculation that a Trump administration may foster a more favorable regulatory environment for digital currencies.

Oil prices continued their downward trend from the previous session, as investors assessed the possibility of a ceasefire between Israel and Hezbollah. Brent crude futures fell 0.38%, settling at $72.73 per barrel, while U.S. West Texas Intermediate crude dropped by 0.46%, to $68.62 per barrel. Both benchmarks had fallen by $2 per barrel on Monday, reflecting ongoing concerns over global supply and geopolitical developments.