(Bloomberg) — Having lived with the risk of a US-led trade war for weeks, financial markets reopened Monday needing to deal with the reality.
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Investors favored the US dollar in early Asia trading and stocks and equity futures slid after President Donald Trump carried out his threat to impose general levies of 25% on Canada and Mexico and 10% on Chinese goods starting on Tuesday, sparking commitments to retaliate from other governments.
Bloomberg’s gauge of the US currency advanced more than 1%, S&P 500 futures slumped close to 2%, while the Canadian dollar weakened to touch its lowest since 2003. The Mexican peso fell nearly 3%, while the risk-sensitive Australian dollar, seen as particularly exposed to the threat of US tariffs against China, dropped more than 1%. The yuan weakened around 0.5% offshore.
Talk of tariffs alone has benefited the greenback since Trump’s election. Last week was its best since mid-November, with the Bloomberg index up nearly 1%. US stocks fell on Friday with carmakers and China-exposed companies leading the slide. Bond traders must decide whether to focus on elevated risk in markets or inflation concerns — benchmark Treasuries fluctuated in early Monday trading.
“Trade tensions may escalate in the short run as other countries are politically obligated to retaliate or mimic the US policies,” said Stephen Jen, chief executive at Eurizon SLJ Capital. “This for the shorter-term should support more dollar strength and higher US yields.”
Behind the bullish dollar position is the bet that tariffs will fuel inflationary pressures and keep US interest rates elevated, while also hurting foreign economies more than the US and adding to the greenback’s safe-haven lure. Foreign currencies get hurt as American demand declines for costlier imports.
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“While a statement from President Trump indicating that the dollar is too strong could impact financial markets, the overall outlook remains unchanged —- tariffs and domestic inflationary pressures are likely to sustain the fundamental trend of dollar appreciation,” said Shoki Omori, chief global desk strategist at Mizuho Securities in Tokyo.
“We expect selling pressure to hit the peso and Canadian dollar at tomorrow’s Asia open, but it’s difficult to assess just how severe the move will be,” said Karl Schamotta, chief market strategist at Corpay in Toronto. “Financial markets may undergo a painful adjustment process in the coming weeks as participants begin to take the president seriously and literally.”
