(Bloomberg) — The dollar rebounded after posting its steepest drop in 14 months as U.S. President Donald Trump said he may enact 25% tariffs on Mexico and Canada in February.
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Bloomberg's dollar gauge rose as much as 0.7% in Asia on Tuesday after the slump in New York trade, as fresh tariff headlines sparked a rush to the reserve currency. The Canadian dollar and Mexican peso fell around 1% against the greenback on the news.
“If tariffs of 25% on Mexico and Canada are coming, surely bigger tariffs on China will follow soon after,” said Rodrigo Catril, a strategist with National Australia Bank Ltd. in Sydney. “The dollar has room to trade higher.”
The surge in the dollar underlines how fierce traders are on any news about duties and their impact across the global economy. Volatility compounded headlines Monday on how the Trump administration would hold off on implementing tariffs immediately after his inauguration, triggering whipsaws across the $7.5 trillion-a-day foreign exchange market.
The 10-year Treasury yield was down eight basis points on the day at 4.55%, after dropping as much as nine basis points earlier. The risk-sensitive Australian and New Zealand dollars also fell.
“Volatility on the back of Trump's off-the-cuff comments will be a regular feature,” said Alvin Tan, strategist at RBC Capital Markets. “Trump likes to pontificate, but he doesn't always follow through on his comments. But the market can't ignore them either.”
China's offshore yuan fell 0.3% after gaining more than 1% in New York trading as Trump previously threatened to impose tariffs on the nation's exports. The People's Bank of China set the yuan reference rate at the strongest level since November 8, in a sign that it is increasing support for the currency.
“Be flexible – that's the only thing I can think of right now,” said Serena Zhou, an economist with Mizuho Securities Asia Ltd., on currency trading. “It is too difficult to try to predict the uncertainty”, he said.
–With assistance from Jaehyun Eom.
(Updates with analyst comment in the 6th paragraph.)
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