Dollar Weakens Amid Tariff Worries and Economic Slowdown Concerns
The U.S. dollar experienced a significant decline on Tuesday, hitting a three-month low as market participants grew increasingly concerned about the potential negative impacts of tariffs on the U.S. economy and the broader global growth outlook. These anxieties overshadowed any potential benefits the dollar might have derived from the imposition of new tariffs on goods from Canada, China, and Mexico.
President Trump’s decision to implement a 25% tariff on goods from Canada and Mexico, coupled with a doubling of duties on Chinese goods to 20%, triggered a wave of retaliatory measures from affected nations. China announced its intention to impose additional tariffs of 10-15% on certain U.S. imports, while Canada confirmed that its retaliatory tariffs on the United States would take effect on Tuesday. Mexico is also expected to follow suit with its own countermeasures.
The escalation of trade tensions has led markets to increasingly factor in a potential slowdown in both U.S. and global economic growth. This shift in sentiment has defied traditional market reactions, where investors would typically buy the dollar and sell foreign currencies in anticipation of weaker currencies stimulating exports.
Brian Daingerfield, a foreign exchange strategist at Natwest Markets in New York, expressed surprise at the market’s reaction, stating, "This tariff reaction, I think, is certainly surprising. We’ve seen the dollar weakened, but I think this reflects markets assumptions about how the tariffs will have a negative impact, not just on external growth, but how it could potentially have a negative impact on U.S. growth."
Investors are closely watching Trump’s address to the U.S. Congress for further insights into the administration’s economic policies. However, the most anticipated event of the week is Friday’s February nonfarm payrolls report, which is expected to provide a clearer picture of the extent of the economic slowdown that has unsettled investors.
The Federal Reserve will be closely monitoring the economic data as it weighs its options regarding future monetary policy. The data will inform the central bank’s decision on whether to resume easing measures or maintain its current pause.
The U.S. dollar index, which measures the currency’s value against six major peers, fell by 0.31% to 106.21, reaching its lowest level since December 6. Chris Turner, global head of markets at ING, noted that "while the U.S. is now broadening its tariff regime to Canada and Mexico, weak domestic U.S. activity… is preventing the dollar from strengthening on the tariff news."
Amid the growing concerns about economic growth and the impact of tariffs, investors have sought refuge in traditional safe-haven currencies such as the Japanese yen and the Swiss franc. Global stock markets also experienced a decline on Tuesday as investors grappled with the uncertainties surrounding the trade war.
The Canadian dollar strengthened overnight, with the dollar/Canada exchange rate remaining relatively unchanged at C$1.4479 after hitting a one-month low of 1.4541 on Monday. The Mexican peso, however, weakened slightly, with the dollar trading at 20.906 pesos after earlier touching its lowest level since February 3.
Analysts believe that market participants are hopeful that the tariffs will be short-lived and that deals can be struck to resolve the trade disputes. Lee Hardman, a senior currency analyst at Japanese bank MUFG, noted that "the price action suggests that market participants remain hopeful that the tariff hikes won’t remain in place for long, helping to limit trade and economic disruption."
The euro gained ground, rising by 0.36% to $1.0523 and reaching its highest level since December 10 at $1.0559. The euro’s strength reflects the absence of tariffs on the European Union and a narrowing of the gap between U.S. and euro zone bond yields, which has made the dollar less attractive.
Euro zone government bond yields have increased relative to those in the United States as Trump’s pullback from supporting Ukraine has fueled expectations of higher borrowing and spending on defense.
Investors are also anticipating the European Central Bank policy meeting on Thursday, where traders are pricing in another 25 basis-point cut.
U.S. 10-year Treasury yields fell to their lowest level since October 21, reaching 4.106%, as traders digested the weak economic data and the tariff headlines.
The British pound rose to an 11-week high of $1.2753 as the dollar weakened and was last up 0.08% at $1.2709.
Trump stated that he had cautioned leaders of Japan and China against devaluing their currencies, asserting that such actions would be unfair to the United States.
The dollar weakened by 0.66% to 148.51 yen, bottoming at 148.07, its lowest level since October 8.
The Chinese yuan firmed to 7.265 per dollar, supported by the central bank’s continued strengthening bias in its daily official guidance.
In the cryptocurrency market, Bitcoin was down 1.71% to $83,829.10, while Ethereum was off 0.55% at $2,098.51.
