President-elect Donald Trump's promise to impose additional tariffs on China, Canada and Mexico on the first day of his presidency signals the start of a wild ride in currency markets, strategists say, warning that it would be risky for investors to overlook the impact Exchange rates underestimate tariffs.
Trump said Monday he would sign an executive order on Jan. 20 imposing a 25% tariff on all goods from Canada and Mexico, a move that could violate the terms of a regional free trade agreement.
The former president, who previously called tariffs “the most beautiful word in the dictionary,” also said he plans to increase tariffs on all Chinese products imported into the United States by another 10%
The announcements led to a knee-jerk reaction in currency markets, with the U.S. dollar gaining more than 2% against the U.S. dollar Mexican peso and reached a four-year high over the Canadian dollar.
“I think the initial reaction here is that investors should prepare for a wild ride of FX volatility,” said Kamakshya Trivedi, head of global FX, rates and emerging markets strategy research at Goldman Sachs.
The U.S. dollar index, which measures the greenback against six major currencies, was 0.1% higher at 106.9 as of 3:50 p.m. London time on Tuesday. The index closed 0.6% lower in the previous session as investors hailed hedge fund manager Scott Bessent as Trump's pick to head the US Treasury Department.
Both the euro and sterling were little changed against the dollar, paring earlier gains.
“We’ll all have to get used to that. There will be volatile movements in the foreign exchange markets because, as you know, currencies are sort of the primary means of responding to any kind of tariff announcement,” Trivedi told CNBC's “Street Signs Europe” on Tuesday.
The Maersk Halifax on the Central and South America route docks at the Qianwan Container Terminal of Qingdao Port in Qingdao, Shandong Province, China, November 10, 2024.
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Goldman's Trivedi said investors should be prepared for wild swings in currency markets in the coming months – but also for the long term, as tariffs will most likely be a prominent feature of Trump's return to the White House.
There are some uncertainties for investors, Trivedi said, pointing to the extent to which Trump's tariffs could be used merely as a negotiating tool, whether they reflect a “maximalist” position or whether the impact of the tariffs has already been priced in by financial markets.
“But I think we will ultimately see an increase in tariffs on a number of economies, particularly China, and I think that will generate a stronger reaction from the dollar across the board,” Trivedi said.
“A big bargaining chip”
The former president's tariff announcements on the social media platform Truth Social fell well short of some of his campaign promises, but strategists remain cautious about the possibility of further announcements and the prospect of retaliation.
Trump has previously suggested he could impose a blanket 20% tariff on all goods imported into the U.S., with a tariff of up to 60% on Chinese products and one of up to 2,000% on vehicles built in Mexico.
“The market seems to be expecting that this trade war is basically just a long negotiation process where the US gets something and China, Europe and Mexico probably have to give something,” Luca Paolini, chief strategist at Pictet Asset Management, told Squawk. by CNBC Box Europe” on Tuesday.
“The point we are making here is that there is a possibility that Trump will impose significant tariffs [and] There will be a lot of pressure in China and Europe and we know how that will end,” he added.
Strategists at Dutch bank ING said on Tuesday that while Trump's tariff threats could be seen as a negotiating tactic before he takes office in January, it would be risky for investors to underestimate the impact on currency markets.
A Mexican Navy ship patrols past container ships at the Port of Manzanillo in Manzanillo, Colima state, Mexico, Tuesday, Nov. 19, 2024.
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“While most market participants expect Trump to use the tariffs as a major bargaining chip — in this case to tighten U.S. border controls — we would be wary of dismissing their impact on the market as hubristic,” said Chris Turner of ING in a research note.
“If 25% tariffs were to go into effect in Mexico, USD/MXN would be a 24/25 story, not just 21. We already expect the currencies of Mexico and Canada to face a tougher Trump 2.0 than “back then.” his first term in office,” he added.
Cautious outlook
Likewise, Citi strategists expect the new Trump administration to use tariffs as a negotiating tool.
“We are still somewhat cautious. I mean, we obviously realize that one headline can make all the difference.” [Mexican] “The peso is up 1.5% to 2% overnight,” Luis Costa, global head of emerging markets strategy at Citi, told CNBC's “Squawk Box Europe” on Tuesday.
“It is absolutely obvious to us that the Trump administration will use tariffs as an important negotiating lever.” [Mexican President Claudia] Sheinbaum's government. “It’s probably more about negotiations than imposing tariffs,” he added.
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