Forex Market Update: Trump’s Tariffs Bite – February 3, 2025

Forex Market Update: Trump’s Tariffs Bite – February 3, 2025

The fallout from former President Donald Trump’s tariffs continues to be felt in the forex market today, with ongoing trade tensions, supply chain disruptions, and shifting currency dynamics. While many of the tariffs were put in place several years ago, their long-term effects are still influencing currency valuations and trade relations, particularly between the U.S. and its major trading partners like China, Canada, and the European Union.

1. U.S. Dollar: Navigating Tariff-Induced Volatility

The U.S. Dollar (USD) has experienced heightened volatility over the past few years due to the trade war initiated by Trump’s tariffs. Although the U.S. economy remains strong in some sectors, the imposition of tariffs created distortions in trade balances, impacting key currencies.

• Impact on Trade Deficit: While the goal of the tariffs was to reduce the U.S. trade deficit, they have often had the opposite effect. With tariffs on imports raising costs for U.S. consumers and businesses, the U.S. trade deficit has remained stubbornly high. This has put downward pressure on the USD in the longer term, despite short-term rallies tied to global risk sentiment.

• USD Volatility: The ongoing uncertainty related to trade relations between the U.S. and major economies is contributing to significant volatility in USD currency pairs. Markets continue to watch for any signs of tariff rollback, especially under the Biden administration, which could ease pressure on the greenback.

2. Chinese Yuan (CNY): Pressured by Tariffs and Trade Tensions

The Chinese Yuan (CNY) remains under pressure, with ongoing U.S. tariffs on Chinese goods being a central issue. Despite efforts to stabilize the currency through interventions by the People’s Bank of China (PBoC), the lingering trade tensions continue to weigh on the Yuan.

• Continued Tariffs on Chinese Goods: While there have been some phase-one trade agreements, many tariffs that were introduced under Trump’s administration remain in place. These tariffs have affected Chinese exports to the U.S., creating ripple effects in the CNY/USD pair and broader market sentiment toward Chinese economic health.

• Export Competitiveness: The tariffs have diminished China’s export competitiveness, which has resulted in slower growth in manufacturing and export-heavy industries. This has, in turn, affected the CNY’s value, especially during periods of global risk aversion.

3. Euro (EUR) and the European Union: Strained by Tariffs

Trump’s tariffs also caused significant stress between the U.S. and the European Union (EU), particularly with the implementation of tariffs on steel and aluminum imports. The EU retaliated with its own tariffs on U.S. goods, and while the Biden administration has worked to ease tensions, the tariff scars still remain in place.

• Tariff Retaliations: The imposition of tariffs on European goods caused disruptions in trade and indirectly impacted the EUR/USD exchange rate. Trade tensions, particularly with countries like France and Germany, also influenced market sentiment, especially in industries like automotive manufacturing and aerospace, which are crucial to the EU economy.

• Eurozone Growth Slows: While the ECB has focused on maintaining accommodative monetary policy, the EU’s overall economic growth has been affected by Trump’s tariffs, contributing to a weaker Euro in comparison to the U.S. Dollar. The Euro’s struggles have been more pronounced when combined with the impact of the global supply chain crisis exacerbated by tariffs.

4. Canadian Dollar (CAD): Navigating U.S. Tariffs and Oil Prices

Canada was another significant casualty of Trump’s tariff policies, particularly in the steel and aluminum sectors. However, the Canadian Dollar (CAD) has found some relief through rising oil prices, as crude oil remains a major export for Canada.

• Impact on Trade: Trump’s tariffs on Canadian steel, aluminum, and other goods led to increased costs for Canadian exporters, creating headwinds for the CAD in the years following their implementation. Though some tariff measures have been eased, trade tensions linger and continue to affect market sentiment.

• Oil and the CAD: The Canadian economy is heavily reliant on oil exports, and fluctuations in crude prices play a significant role in CAD performance. As oil prices rise, the CAD strengthens. However, global trade uncertainties tied to tariffs and supply chain issues can dampen the CAD’s upward momentum.

5. Mexican Peso (MXN): U.S. Tariff Impact on Trade and Investment

Mexico, too, has faced the brunt of Trump’s tariff policies, particularly in the automotive sector, where tariffs on steel and other manufacturing goods hit the Mexican export industry hard. The imposition of tariffs under the U.S.-Mexico-Canada Agreement (USMCA) framework has caused ongoing concerns about trade flows between the U.S. and Mexico.

• Trade Disruptions: Tariffs on Mexican exports to the U.S. contributed to economic slowdown in Mexico, leading to periods of weakness for the Peso. While the agreement under USMCA replaced NAFTA, tariffs on key goods still influence trade between the two countries.

• Peso Performance: While the Mexican Peso has benefitted from relative stability in oil prices and ongoing trade cooperation, the peso remains vulnerable to shifts in U.S. policy. As global trade tensions ease or escalate, the MXN will likely continue to reflect these dynamics.

6. Geopolitical Tensions and Global Market Sentiment

Trump’s tariffs were a key factor in reshaping global trade dynamics, and the ongoing geopolitical tension stemming from trade wars continues to impact forex markets. Risk sentiment remains fragile, as traders assess the potential for tariff rollbacks or escalation under new leadership.

• Risk-On vs. Risk-Off Sentiment: The forex market remains sensitive to developments in trade policies. Risk-on sentiment, where investors move into higher-yielding assets, often causes weakness in safe-haven currencies like the USD and JPY. Conversely, a deterioration in trade relations or the re-imposition of tariffs could trigger a risk-off mood, strengthening the USD and other safe-haven currencies.

Conclusion: The Long-Term Impact of Tariffs on Currency Markets

Though the U.S. has made efforts to stabilize trade relations with several major economies since Trump’s tariff policies were implemented, the long-term effects on global currency markets continue to linger. Traders should stay alert to the evolving tariff landscape, as any sudden changes could lead to sharp volatility, particularly for currencies like the CNY, EUR, and CAD, which have been directly impacted by the trade war. As we head further into 2025, the legacy of Trump’s tariffs will continue to influence forex market trends.