By Ankur Banerjee
SINGAPORE (Reuters) -The Canadian dollar and the Mexican peso fell to their lowest levels in a month on Tuesday as trade war fears became a reality after U.S. President Donald Trump followed through on his tariff threats against Canada, Mexico and China.
Trump’s new 25% tariffs on goods from Mexico and Canada took effect, along with a doubling of duties on Chinese goods to 20%, at 12:01 a.m. EST (0501 GMT).
Minutes later, China said it will impose additional tariffs of 10%-15% on certain U.S. imports from March 10. Canada has already said that retaliatory tariffs on the United States would take effect on Tuesday.
Mexico is expected to follow suit, with President Claudia Sheinbaum expected to announce her response during a morning news conference in Mexico City later on Tuesday.
Market moves were fairly muted in the immediate aftermath of the tit-for-tat tariff actions, although investors remained on edge, with worries of a wide-ranging trade war sapping sentiment.
That left currency markets fragile, with the loonie a touch weaker at $1.4491 having hit a one-month low of $1.45415 on Monday. The Mexican peso <MXN=> slid over 0.5% to 20.821 per dollar, its lowest since February 3 and was last at 20.739.
The risk-sensitive Australian dollar slid to a one-month low of $0.6187 and was last down 0.32% at $0.6206. [AUD/]
“While the moves from China may not be particularly bold, there is reason to believe that China wants to be on the negotiating table with Trump rather than sitting back and absorbing the blows,” said Charu Chanana, chief investment strategist at Saxo.
“The move still brings risks of an escalation first in trade tensions before resolution.”
The tariff actions led to a rally in U.S. Treasuries. The yield, which moves inversely to bond prices, on the benchmark 10-year U.S. Treasury note hit 4.115% in Asian hours, its lowest since October 22.
“The decision by Trump to go ahead with tariffs on Mexico and Canada has turned fear into reality,” said Vasu Menon, managing director of investment strategy at OCBC.
Menon said the tariffs will rattle markets as investors worry that the move will cause inflation expectations to rise and cause U.S. growth to slow down as these countries make up a large part of U.S. imports.
YEN AND YUAN
Trump said on Monday he told leaders of Japan and China they cannot continue to reduce the value of their currencies as doing so would be unfair to the United States.
Trump’s criticism of a weak yen and uncertainty on how his tariff threats could affect global growth may complicate the Bank of Japan’s decision on how soon to raise interest rates.
On Tuesday, the yen was stronger at 149.33 per dollar, hovering close to the four-month high it touched last week.
China’s yuan held largely steady around 7.2763 to the dollar, aided by the central bank continuing a strengthening bias in its daily official guidance.[CNY/] But analysts at BofA maintained their forecast that it would weaken to 7.6 by end-June as more trade threats loom.
“President Trump’s remarks on China and Japan weakening their currencies, while not true, might encourage their authorities to jawbone the currencies lower to avoid higher tariffs,” said Carol Kong, currency strategist at Commonwealth Bank of Australia.
“I think this is more likely to happen with China as it is President Trump’s number target with regards to tariffs. There is a risk the Chinese government will use a one-time yuan appreciation as a bargaining chip in negotiations with the U.S.”
China’s central bank has set its official guidance on the firmer side of market projections since mid-November, which analysts and traders see as a sign of unease over the yuan’s decline.
The euro was steady at $1.04812 after a sharp rebound in the previous session as traders remain on tenterhooks in the hopes of a peace deal to end the Ukraine war, with European leaders floating proposals for a truce.
The single currency didn’t flinch after a White House official confirmed that the United States is pausing military aid to Ukraine days after Trump clashed with Ukrainian President Volodymyr Zelenskiy in the Oval Office that unnerved investors.
Investors are also keeping an eye out for the European Central Bank policy meeting on Thursday, with traders pricing in another 25 basis point cut. The ECB has cut rates five times already since last June in a nod to quickly slowing inflation.
Sterling last bought $1.2693, while the New Zealand dollar eased 0.14% at $0.56085.
(Reporting by Ankur Banerjee in Singapore, additional reporting by Davide Barbuscia in New YorkEditing by Shri Navaratnam and Kim Coghill)
