Donald Trump’s return to the White House has brought instability to global currency markets, as the newly elected president threatens sweeping tariffs against major trading partners.
These changes are a likely response to Trump’s threat of implementing tariffs of up to 25% on Canadian and Mexican imports.
The US dollar, which fell between 0.5% and 1.5% against G10 currencies. The US dollar index held steady at around 108.00.
China’s offshore renminbi weakened by 0.25% following Trump’s announcement of a possible 10% tariff linked to fentanyl trafficking, whilst the CSI 300 index dropped 1%. However, Beijing’s measured response and Trump’s softer-than-expected initial approach have sparked cautious optimism for potential negotiations.
The pound sterling retreated against a rebounding dollar on Tuesday despite Trump’s initial restraint on tariffs; the pound traded near 1.24. The UK’s softening labour market strengthened expectations of a February rate cut by the Bank of England to 4.5%.
The euro emerged as a surprise outperformer, surging 1.5% against the dollar late on Monday 21 January.
The Australian dollar remained particularly vulnerable to Trump’s trade rhetoric, hovering near 0.63 against the US dollar. Expectations of an imminent rate cut from the Reserve Bank of Australia added additional pressure. The currency’s movements remain closely tied to developments in US-China trade relations.
The Indian rupee exhibited marked volatility, trading between 86.20 and 86.80 against the dollar, as Trump’s trade policies amplified existing pressures on emerging market currencies. Foreign investors have withdrawn more than $7 billion from Indian markets this month, although domestic factors such as upcoming budget allocations may provide some support for the currency.
The Japanese yen retreated from a one-month high against the dollar, trading above 155.50, as markets balanced Trump’s trade threats against expectations of an imminent rate hike by the Bank of Japan. If trade tensions escalate, the yen’s ‘safe-haven’ appeal could strengthen despite the current risk-positive market sentiment.
Trump’s trade policies could limit the Federal Reserve to just one more rate cut, potentially providing some stability for the dollar against major currencies. However, the threat of escalating trade tensions continues to cast a shadow over global currency markets.
