The U.S. dollar rose on Tuesday following the implementation of new U.S. tariffs on Chinese imports, which led to immediate countermeasures from Beijing. This escalation prompted a sell-off in both the Chinese yuan and the Australian dollar.
The tariffs, which went into effect at 12:01 a.m. on Tuesday, added 10% to the cost of goods coming from China. In response, China retaliated by imposing tariffs on U.S. goods. China’s Ministry of Finance placed a 15% tax levy on U.S. coal and liquefied natural gas, and a 10% tariff on crude oil, agricultural machinery, large-displacement cars, and pickup trucks from the U.S. These measures take effect on February 10. This reignited trade tensions between the world’s two largest economies. President Donald Trump has justified these tariffs partly as a means to finance tax cuts, suggesting a strategic, if not permanent, shift in trade policy.
The U.S. dollar index, which tracks the greenback against a basket of six major currencies, increased by 0.15% to reach 108.6. The Chinese yuan weakened by 0.35% to 7.3207 per dollar in offshore markets, although this was an improvement from Monday’s record low of 7.3631 yuan. Markets in mainland China remained closed for the Lunar New Year holiday, with no official trading until Wednesday.
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The Australian dollar, often seen as a stand-in for the yuan due to Australia’s economic ties with China, dropped by 0.35% to $0.6206. This was a recovery from Monday’s dip to $0.6085, the lowest since April 2020.
The euro also saw a decline, slipping 0.15% to $1.0328, amid threats from the U.S. that the European Union could be next for trade penalties. Analysts are watching closely as the euro approaches parity with the dollar, with some suggesting that under certain conditions, the euro could fall to 0.98-0.99 against the dollar.
Elsewhere, the Canadian dollar and Mexican peso weakened. The Canadian dollar fell 0.15% to C$1.4451, bouncing back from a low of C$1.4792 on Monday, which was the weakest since 2003. The Mexican peso remained stable at 20.3460 per dollar, significantly better than the previous day’s three-year low of 21.2882.
Market sentiment remains wary as the ongoing trade war introduces volatility. Analysts at TD Securities noted an increase in trading uncertainty, predicting that any dips in the USD/CAD pair would be brief, with expectations for the rate to climb to C$1.50 by the end of March, driven by Canada’s relatively weaker economic outlook and persistent trade tensions.
Sterling also weakened, dropping 0.25% to $1.2410, despite suggestions from Trump that the UK might avoid similar tariffs. Meanwhile, the U.S. dollar gained 0.5% against the Japanese yen, reaching 155.50.
This underscores the Forex market increasingly attuned to the risks posed by the intensifying U.S.-China trade conflict, with the U.S. dollar emerging stronger. The immediate counter-tariffs from China not only reignited trade tensions but also led to a noticeable depreciation of the yuan and currencies tied closely to China’s economic fortunes, like the Australian dollar. The broader implications are significant: global currency markets are adjusting to a new normal where trade policies dictate economic stability, potentially leading to recalibrations in monetary policies worldwide. The strengthening of the dollar may lead to the weakening of other major currencies.