Dollar Strengthens as Trump Proposes Tariffs and Revives Panama Canal Talk

The dollar experienced a partial recovery on Tuesday after a significant decline the previous day. This rebound was influenced by President Donald Trump's announcement that the United States could impose tariffs on Canada and Mexico by February 1. This sudden mention presented a stark challenge to earlier assumptions that his trade policy would be implemented in a more gradual manner.

During a press conference, Trump indicated that discussions were ongoing about tariffs possibly reaching around 25 percent. However, no specific details were provided. He also raised the idea of implementing universal tariffs but stated that the U.S. was not yet prepared for that step.

The dollar had dropped sharply on Monday, following Trump's first day in office, which included no particular plans regarding tariffs. Officials had suggested that any new taxes would be imposed in a “measured” way, much to the relief of currencies that are heavily affected by trade conditions.

A memo released by the administration simply directed agencies to investigate the ongoing trade deficits without giving a clear plan of action.

Dominic Bunning, head of G10 FX strategy at Nomura, remarked, "Even though nothing specific was announced, there remains a clear threat that significant tariffs are on the horizon." He added that while the anticipated speed and scale of potential tariffs might have reduced somewhat, market participants are still cautious.

In the wake of Trump's comments, the Canadian dollar and Mexican peso experienced a quick decline, while the dollar rose. The U.S. currency increased by 0.8 percent against the Canadian dollar, reaching 1.4429, and strengthened by 1.2 percent against the Mexican peso.

Moreover, the dollar index, which compares the U.S. dollar against six other major currencies, rose by 0.6 percent to 108.58. This increase came after a 1.2 percent drop the previous day, marking the most significant decline since late 2023.

The euro also dipped to $1.0362 after reaching $1.0434 earlier in the day. The European Union is seen as a potential target for Trump’s tariffs, given its considerable trade surplus with the U.S. During a press event, Trump mentioned that he would address the trade imbalance through either tariffs or by encouraging Europe to buy more U.S. oil and gas.

"The early hours of the Trump administration highlight that we should expect an unpredictable policy landscape and prepare for market volatility," stated Charu Chanana, Chief Investment Strategist at Saxo in Singapore. "It appears that the markets may have reacted too optimistically when tariff threats were notably absent from Trump’s inaugural speech.”

Trump's inaugural address highlighted critical issues such as immigration and energy, presenting a more interventionist foreign policy strategy, which intriguingly included a pledge to take back the Panama Canal.

Reflecting on Trump’s past term, it is notable that he frequently announced potential policy actions, like healthcare and infrastructure plans, which often did not materialize.

Against the Japanese yen, the dollar showed little change, standing at 155.68. Bunning noted that the yen has some room to strengthen, remarking that Japan is likely less affected by tariffs than many other countries.

Recently, the yen has received support amidst rising expectations that the Bank of Japan might raise interest rates in its upcoming policy meeting, following recent comments from officials.

Currently, the market indicates an 86 percent chance of a quarter-point rate hike. The dollar also rose by 0.3 percent against the offshore Chinese yuan, trading at 7.2896. Trump has issued previous threats of tariffs as high as 60 percent against China but was vague in his recent statements.

Later, Beijing set a stronger fix for the yuan, suggesting that it intends to avoid a rapid depreciation of the currency. The onshore yuan concluded the domestic session at 7.2798 per dollar, marking the strongest close since December 13.

Dollar, Tariffs, Economy