The financial markets were caught off guard on Monday as Donald Trump’s aggressive tariff measures sent shockwaves across global asset classes. The US dollar surged, equity markets tumbled, and investors rushed to reassess how these tariff impacts could reshape trade relations and economic momentum.

Dollar’s Dominance Strengthens Amid Tariff Turmoil

The US Dollar Index (DXY) soared over 1.3% to 109.70, marking a broad-based rally against major currencies. The Canadian dollar plunged to its lowest level since 2003, Mexico’s peso shed nearly 3%, and even the euro slid 1.3% to hit a two-year low. Interestingly, the Swiss franc—often considered a safe-haven asset—also weakened, reflecting the sheer dominance of the greenback in the face of uncertainty.

Market Reaction: A Global Selloff

• Equities Bleed: US stock futures nosedived, with S&P 500 contracts slipping 2% and Nasdaq 100 futures tumbling 2.6%. European markets followed suit, with Euro Stoxx 50 futures losing 2.4%.
• Retaliation Begins: Canada and Mexico, America’s top trading partners, wasted no time in announcing retaliatory measures, while China signaled plans to challenge the tariffs at the WTO.
• Federal Reserve’s Role: Traders pared back expectations of aggressive rate cuts from the Federal Reserve, trimming 6 basis points off rate-cut pricing. Futures markets now assign a 54% probability of two Fed cuts this year, down from prior expectations.

Why Markets Were Shocked

What caught investors off guard was not just the tariffs themselves, but their immediate implementation. The US slapped Canada and Mexico with 25% duties and imposed a 10% levy on China, citing reasons beyond trade—such as illegal immigration and drug control.

The surprise for markets is that Canada and Mexico retaliated immediately, and that other regions, such as China and the EU, may follow suit, leading to an even more volatile environment ahead.

What’s Next for the US Dollar?

With global risk sentiment deteriorating and investors seeking refuge in the dollar, the DXY could test its July 2022 peak of 114 in the coming months. A short-term pullback is possible, but dip-buying behavior in the dollar remains strong, making it difficult for rival currencies to mount a meaningful recovery.

Key Drivers for the Dollar’s Rally

• Higher Tariffs = Stronger Dollar: The US trade deficit could narrow as imports from tariff-hit countries decline, reducing demand for foreign currencies.
• Federal Reserve’s Stance: If inflation remains sticky due to higher import costs, the Fed may delay rate cuts, providing further support to the greenback.
• Flight to Safety: Global uncertainty and potential trade wars could fuel risk aversion, leading investors to favor the US dollar as a safe-haven asset.

Final Thoughts | Join YaMarkets Weekly Webinars

Trump’s tariff war has just begun, and the global economy is already feeling its impact. While the US dollar remains a primary beneficiary of the turmoil, the ripple effects on trade, inflation, and central bank policies will dictate the next phase of market movements.

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