The U.S. currency surged across the board, while stock futures plunged on the first full day of trading since Trump slapped tariffs on imports from China, Canada and Mexico.
European stocks markets tumbled on Monday and the euro swooned, after U.S. President Donald Trump fired the opening salvo of what could become an all-out trade war by slapping tariffs on Canada, Mexico and China.
Investors sold off stocks in both Europe and Asia, with the benchmark Stoxx 50 index falling 1.6 percent by early afternoon in Europe. The move reflects fears of widespread upheaval, as the White House upends the global economic order. The dollar, which tends to rise at moments of financial stress and uncertainty, surged across the board.
In three executive orders on Saturday night, the Trump administration levied tariffs of 25 percent on Canadian and Mexican goods, although Canadian energy imports were granted a partial carve-out with a 10 percent tariff. Chinese goods face an additional 10 percent tariff. The measures take effect Tuesday.
The measures were broadly as threatened by Trump during his election campaign last year, but still had an immediate impact as many in the markets had hoped that his threats were only a bargaining ploy. Similar treatment for the European Union now seems a near-certainty.
On Sunday, Trump described the U.S.’s trade relation with the EU as “an atrocity.” “[The] European Union is really out of line,” said Trump. On Friday evening, Trump vowed to “absolutely” impose tariffs on EU goods.
Already in his first term, Trump had placed tariffs on European steel, later rolled back by the Biden administration. His new plans, however, are much broader and more ambitious.
“This is much more worrisome than what we had eight years ago,” said Carsten Brzeski, global head of macro at Dutch bank ING., warning that international markets continue to underestimate the potential fallout of the trade conflict. “This is different because this is much tougher, this much more extreme.”
In currency markets, the euro fell as much as 1.3 percent to its lowest in more than two weeks, before recovering a little to trade at $1.0248 by 12:50 CET. That reflected awareness that the eurozone, whose trade surplus with the U.S. ran at over €40 billon a month last year, has a lot to lose from such a conflict.
Bank of France Governor François Villeroy de Galhau told France Info on Monday that Trump’s “very brutal” measures “will increase economic uncertainty,” hurting the auto industry in particular.
It also raised expectations, endorsed by Villeroy that the European Central Bank will continue to cut interest rates, despite data on Monday that showed inflation ticking up to 2.5 percent in January.
The dollar also surged 1.2 percent against the Canadian dollar and 2.1 percent against the Mexican peso. Both Canada and Mexico have already announced countermeasures.
Trump is aiming to use tariffs to rebalance the U.S.’s huge trade deficit and bring manufacturing back to the U.S. In the first instance, however, economists say they will push up prices and hurt growth across the globe.
Julian Hinz, an economist at the Kiel-based Institute for World Economy in Germany, estimated that the hit to the Mexican economy could be more than 4 percent of gross domestic product in the first year of tariffs, while the hit to Canada could be nearly 3 percent. For Canada, the worst-case scenario could yet be avoided, as Trump has only levied a 10 percent duty on energy imports, rather than the full 25 percent levied on other goods.
Boomerang effect
But market reaction on Monday made clear that investors expect the U.S. economy to be hit, too. Yields on short-dated U.S. Treasury bonds rose, reflecting expectations that the tariffs will quickly feed through into prices for food, energy, smartphones and construction, and stop the Federal Reserve from cutting interest rates any further. U.S. stock futures, which had already sold off on Friday, extended their losses in premarket trading on Monday, falling by some 1.5 percent.
In part, that is due to a robust response at the weekend from Canada, where Prime Minister Justin Trudeau imposed immediate tit-for-tat tariffs on some $155 billion worth of U.S. exports.
“What the Canadian government has done so far has been a strong reaction,” said Tobias Gehrke, senior policy fellow at the European Council on Foreign Relations. More than three-quarters of Canadian exports go to its southern neighbor. Along with tariffs, Trudeau also urged citizens to avoid U.S. products and to buy Canadian ones instead.
Reports indicated that Beijing too would announce countermeasures, possibly including restrictions on the export of critical raw materials such as rare earths.
Gehrke said that the EU was ready to respond, “at least at the technical level,” but the risk was that Washington would exploit divisions between Trump-friendly, right-wing capitals like Rome, Budapest and Vienna, and the rest of the bloc, for example by putting tariffs on products overwhelmingly produced in Germany, and not elsewhere.
“The question is … if the member states support [an] approach to stand up to Trump, even if it comes at a significant cost,” he said.