Dollar Surges as Trump’s Tariffs Spark Safe-Haven Demand

The U.S. dollar soared on Monday, hitting a three-week high after President Donald Trump’s latest tariffs fueled demand for safe-haven assets.

Key Moves in the Currency Market

• Dollar Index: Up 1% to 109.305 (09:30 GMT), after touching a three-week high.
• Chinese Yuan (Offshore): Fell to a record low against the greenback.
• Mexican Peso: Dropped to its lowest in nearly three years.
• Canadian Dollar: Hit levels not seen since 2003.
• EUR/USD: Dropped 1.1% to 1.0248, reaching its lowest level since November 2022.

What’s Driving the Dollar Rally?

1. Trump’s Tariff Announcement
   • 25% tariffs on Canada and Mexico.
   • 10% duty on Chinese imports.
   • Stated reason: To combat illegal immigration & drug trade.
   • Impact: Sparks renewed trade war fears, boosting the dollar as a safe haven.
2. Retaliation & Global Growth Risks
   • Canada, Mexico, and China vowed countermeasures.
   • Markets anticipate a renewed trade war, weighing on global economic growth.
   • Investors expect higher inflation in the U.S., reducing bets on Fed rate cuts.
3. Federal Reserve’s Stance
   • Fed kept rates at 4.25%-4.50% last week.
   • Officials removed language suggesting inflation was making progress toward 2% target.
   • Traders now expect fewer rate cuts in 2025, supporting the dollar.

Euro Struggles Amid Tariff Concerns

• Trade Fears: U.S. ran a $200B trade deficit with the EU last year, raising risks of tariffs on Europe.
• German Manufacturing PMI: Rose to 45.0 in January (highest since May 2024), signaling slower contraction but still below the 50 growth threshold.
• ECB’s Recent Rate Cut: 0.25% reduction last week (5th cut since June 2024) highlights economic weakness.

Market Outlook

• Short-Term: The dollar remains strong as tariff uncertainty drives safe-haven demand.
• Long-Term: Tariff escalation could disrupt global trade, forcing central banks to adjust policies.
• Key Watchpoints:
  • Potential U.S. tariffs on Europe.
  • China’s market reaction after Lunar New Year.
  • Fed’s next policy signals on inflation & rate cuts.