TLDR:
- Trump announces 25% tariffs against Canada, China, and Mexico, causing investors to flock to US dollar as a safe haven
- Goldman Sachs predicts dollar to break parity with euro; JPMorgan forecasts USD/CAD to reach 1.50
- Canadian dollar falls to lowest level in over 20 years; Mexican peso, euro, and Australian dollar hit multi-year lows
- Leveraged funds are more bullish on USD than any time since September 2018
- Canada has responded with 25% counter-tariffs; Mexico and China vow retaliation, while EU promises firm response if targeted
President Donald Trump’s announcement of new 25% tariffs against Canada, China, and Mexico has sent shockwaves through currency markets, pushing the US dollar to new heights as investors seek safety amid growing trade tensions.
The tariffs, set to take effect on Tuesday, have triggered immediate market reactions. The Canadian dollar dropped to its weakest position in more than two decades, while the Mexican peso, euro, and Australian dollar all fell to multi-year lows against the strengthening US dollar.
Major Wall Street institutions are betting on further dollar gains. Goldman Sachs expects the US dollar to break parity with the euro, while JPMorgan predicts the USD/CAD exchange rate could reach 1.50, a level not seen in a generation.
The dollar’s rise comes as investors view it as a safe haven during uncertain times. Market analysts note that tariffs have a clear and direct impact on exchange rates compared to other asset classes. Goldman Sachs strategists, led by Dominic Wilson, predict the euro could fall by 8% to 10% in a global tariff scenario.
Traders had initially hoped Trump might hold back on implementing tariffs, particularly against China, given his softer tone earlier. However, these hopes proved temporary as the president moved forward with his trade restrictions.
The appeal of the US dollar stems from several factors. Analysts believe a trade war could boost US inflation and interest rates while potentially causing more harm to foreign economies than to the United States. This combination makes the dollar more attractive as a safe-haven investment.
Leveraged funds currently show the highest bullish sentiment toward the dollar since September 2018, according to data from the Commodity Futures Trading Commission compiled by Bloomberg.
Wells Fargo macro strategist Erik Nelson suggests the currency market’s reaction has been relatively mild so far. He believes the dollar has substantial room for additional gains if Trump extends tariffs to other trading partners. The Bloomberg Dollar Index could quickly exceed its 2022 highs, potentially gaining another 3% or more.
JPMorgan recommends positive positions in both the dollar and yen against currencies of economies targeted by tariffs. Their analysis suggests the Canadian dollar could weaken to 1.58 per US dollar, while the Mexican peso could hit 23.50 and the offshore yuan could reach 7.37.
The European Union, though not included in the current round of tariffs, faces potential future restrictions. Trump has stated that tariffs against the EU “will definitely happen.” This threat has contributed to the euro’s weakness against the dollar.
Goldman Sachs predicts further strengthening of the dollar against the Chinese yuan, suggesting the onshore yuan could weaken to 7.50 per dollar as investors seek safe-haven currencies.
Not all analysts share the same outlook. Citigroup strategists expect dollar strength in the short term but warn this trend could reverse as markets evaluate the impact of tariffs on the US economy.
Canada has already responded to Trump’s actions with its own 25% counter-tariffs on US goods. Mexico and China have promised to retaliate, while the European Union has pledged to “respond firmly” if targeted by US tariffs.
The dollar’s rally faces some complicating factors. Economic research typically shows trade disputes harm all involved parties, which could increase market volatility. There’s also uncertainty about Trump’s next moves, given his history of unpredictable policy decisions during his first term.
Some traders remain cautious about making long-term bets. Ken Peng, head of investment strategy for Asia at Citigroup’s wealth division in Hong Kong, suggests buying volatility rather than making directional bets in the current environment.
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