(Bloomberg) -- The dollar surged in early Asian trading and stocks were primed for losses after US President Donald Trump carried out his threat to impose general levies of 25% on Canada and Mexico and 10% on Chinese goods from Tuesday, sparking vows of retaliation.
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The US currency advanced against most of its major peers, sending the Canadian dollar to its weakest since 2003, the euro to its lowest since November 2022 and the Mexican peso to an almost three-year low. Equity futures in Australia and Japan fell on Friday after Trump pledged to impose the tariffs.
The rapid escalation in trade tensions is fueling a flight to haven assets as uncertainty mounts over everything from inflation and central bank policy easing to Trump’s next move. While Trump has pledged sweeping trade levies since his election win in November to combat issues such as illegal immigration and illicit drugs, global stocks had rallied more than 3% while the dollar edged lower this year in anticipation tariffs would be delayed or avoided as officials sought to negotiate deals.
“The market needs to structurally and significantly reprice the trade war risk premium” with the announcements at the weekend roughly three times larger than what was envisaged, George Saravelos, head of FX research at Deutsche Bank, wrote in a note to clients. “For Canada and Mexico, we see this trade shock - if sustained - as being far larger in economic magnitude than that of Brexit on the UK and would expect both countries to enter a recession in coming weeks.”
The S&P 500 reversed gains and fell 0.5% following the White House announcement Friday, the dollar climbed against major peers and the yield on 10-year Treasuries rose two basis points. Bitcoin slumped.
Behind the rally in the dollar is the bet that tariffs will fuel inflationary pressures and keep US interest rates elevated, while also hurting foreign economies more than the US and adding to the greenback’s safe-haven lure. Foreign currencies get hurt as American demand declines for costlier imports.
Traders are on alert for big swings in stock markets in sectors that are considered the front lines of any trade war. A UBS Group AG basket of stocks at risk from the proposed tariffs sank almost 4% on Friday on concerns levies would fan inflation and hit bottom lines.
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Automakers such as General Motors Co. and Stellantis NV, which have global supply chains and massive exposure to Mexico and Canada, could see significant moves. Electric vehicle manufacturers Tesla Inc., and Rivian Automotive Inc. could also feel the pinch. Mentions of the word “tariffs” are already surging on earnings calls.
“What makes the issue more of a concern for risky markets, and an increased challenge for market participants to price, is the fact that the Canadians were so quick to counter,” said Chris Weston, head of research at Pepperstone Group in Melbourne. “The market now looks further afield, with China the far bigger issue for global markets, and we’ve already heard that they will come back and counter, although we have limited clarity on what that looks like.”
In Asia Monday, traders will also be focused on Australian retail sales to help gauge the health of the consumer as they continue to finesse bets on Reserve Bank of Australia policy easing. The China Caixin manufacturing PMI will also be parsed to help assess the health of the world’s second largest economy.
In commodities, oil will be closely watched after energy imports from Canada faced a lower 10% levy.
Some key events this week:
Australia retail sales, building approvals, Monday
China Caixin manufacturing PMI, Monday
Eurozone HCOB Manufacturing PMI, CPI, Monday
UK S&P Global Manufacturing PMI, Monday
Atlanta Fed President Raphael Bostic speaks on the economic outlook, Monday
Alphabet, UBS Group, BNP Paribas earnings, Tuesday
New Zealand unemployment, Wednesday
Toyota earnings, Wednesday
China Caixin services PMI, Wednesday
Eurozone HCOB Services PMI, PPI, Wednesday
Eurozone retail sales, Thursday
UK rate decision, Thursday
Amazon earnings, Thursday
Mexico rate decision, Thursday
India rate decision, Friday
Canada unemployment, Friday
US nonfarm payrolls, unemployment, University of Michigan consumer sentiment, Friday
Some of the main moves in markets:
Currencies
The euro fell 1% to $1.0254 as of 7:14 a.m. Tokyo time
The Japanese yen rose 0.1% to 155.85 per dollar
The offshore yuan fell 0.5% to 7.3582 per dollar
The Australian dollar fell 0.9% to $0.6165
Cryptocurrencies
Bitcoin rose 0.7% to $97,646.56
Ether rose 0.9% to $2,934.31
Stocks
Bonds
This story was produced with the assistance of Bloomberg Automation.
--With assistance from Michael G. Wilson.
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