President Donald Trump’s renewed pledges to impose 25 percent tariffs on imports from Canada and Mexico sent shockwaves across the foreign exchange markets on February 1, 2025. The announcement jolted the currency exchange, causing the Canadian dollar to plummet by 1.2 percent and the Mexican peso to drop by 1.1 percent against the U.S. dollar. Both currencies experienced this decline after Trump reiterated his commitment to following through on these tariffs at the White House, which he initially promised during his inauguration.
Such drastic trade restrictions have raised immediate concerns among investors. The Bloomberg Dollar Spot Index, reflecting the relative strength of the U.S. dollar, saw a resurgence, gaining up to 0.2 percent during the New York trading session. Nathan Thooft, senior portfolio manager at Manulife Investment Management, remarked on the situation, stating, "Continued U.S. dollar strength is the path of least resistance as investors continue to grapple with the uncertain-but-persistent threat of increased tariffs." These sentiments echo across traders as they navigate the potential outcomes of these proposed tariffs.
The anticipation of substantial tariffs has already exerted downward pressure on both the Canadian and Mexican currencies. Last quarter, the loonie lost nearly six percent against the greenback and has recently plummeted to its lowest values since 2020. Analysts believe the currency could worsen significantly if the full force of the tariffs hits, possibly pushing it down to levels not seen for over two decades. A considerable 25 percent tariff would compel the Bank of Canada to implement much more aggressive interest rate cuts than originally planned, leading to fears of economic recession.
Strategists on Wall Street are keeping their eyes on the dollar-versus-loonie scenario. Sarah Ying, head of FX strategy at CIBC Capital Markets, stated, "Before the announcement, the market was already braced for some upside U.S. dollar versus Canadian dollar scenario, but now, this view is reinforced. We don’t think it’s time to move against the crowd.” Such thoughts reflect the mounting apprehension about the tariffs' overall impact on the economy.
Mexican assets are also bearing the brunt of this economic turbulence. Despite previously holding steadfast against the U.S. dollar, January 2024 has been described as the worst year for the peso since the global financial crisis, as traders brace for Trump’s imminent return to the White House amid local political unrest. Deutsche Bank economist Francisco Campos has suggested if tariffs are imposed on Mexico, they could potentially see the peso lose as much as 10 percent of its value against the greenback.
This potential trade war is stirring fears for Mexican investors, as well. Money managers may begin to withdraw from Mexican dollar bonds and expect losses among companies exporting goods to the United States. The ripple effects could extend throughout the Mexican economy, creating significant instability.
Economists have long warned of the inflationary pressures tariffs could create within the U.S. economy, particularly for food prices. Despite Trump's stated goal of reducing costs for American consumers, the imposition of tariffs is likely to have the opposite effect, driving food inflation higher. The expectation is clear; as import costs rise due to tariffs, this is expected to be passed along to consumers, which will burden households already faced with high inflation rates.
The realities of international trade are complex, and the current threats from the Trump administration are reshaping investor sentiments and currency valuations. Concerns are mounting not only about immediate impacts but the long-term effects on North American trade relationships and economic stability.
Both domestic and international observers are now left asking: will these tariffs be implemented, and if so, how will they affect the broader economic picture? With the situation continuously developing, analysts and economists will keep their watchful eyes on market movements, currency fluctuations, and potential responses from both Canada and Mexico to Trump's tariff announcements.