Equity markets retreat, dollar gains as Trump fires tariff warning ~ EconomyLens.com

Hong Kong (AFP) – Stock markets fell and the dollar rallied Tuesday after Donald Trump warned he would impose huge new tariffs on China, Mexico, and Canada on his first day in office, dealing a blow to hopes of a more moderate approach to trade policy. The former and next president said on his Truth Social account that he would hammer the United States’ largest trading partners in response to the illegal drug trade and immigration.

The news dampened optimism that his pick to lead the Treasury, Scott Bessent, could temper the tycoon’s assertiveness, with fears now of another trade war with China and warnings that the move — along with promised tax cuts — will reignite US inflation. “On January 20th, as one of my many first Executive Orders, I will sign all necessary documents to charge Mexico and Canada a 25 percent tariff on ALL products coming into the United States, and its ridiculous Open Borders,” he wrote. In another post, he added that he would hit China with a 10 percent tariff “above any additional Tariffs” on all of its products entering the US, citing Beijing’s failure to tackle fentanyl smuggling.

Liu Pengyu, a spokesman for China’s embassy in the United States, told AFP that “no one will win a trade war”, while the foreign ministry later said it would be “open to dialogue” with Washington. Trump’s announcement fueled a sell-off across Asian markets, while London, Paris, and Frankfurt opened on the back foot. The dollar surged around one percent against its Canadian equivalent and Mexico’s peso as well as the Chinese yuan. However, the yen strengthened thanks to its safe haven status.

“In a striking return to hardline policies, President-elect Trump has dramatically escalated tensions with a brash promise to impose a sweeping 25 percent tariff on all imports from Canada and Mexico the moment he reassumes office,” said SPI Asset Management’s Stephen Innes. He said the declaration “shatters any lingering hopes that… Scott Bessent might usher in an era of moderation.” Initially hailed as a beacon of stability, Bessent’s influence now seems overshadowed by a resurgence of Trump’s uncompromising ‘America First’ doctrine, which starkly excludes even the closest of allies from its protective embrace.

Still, Hong Kong edged up marginally and losses in Shanghai were limited, with Heron Lim, assistant director-economist at Moody’s Analytics, saying the 10 percent levy on China was well short of the 60 percent Trump flagged on the campaign. “An added 10 percent extra in response to a non-economic driver with opioids seems light compared to what they have been expecting,” he told AFP. “And with Trump hitting two of its key importers, Canada and Mexico, harder with the proposed 25 percent tariffs, it actually makes China’s goods relatively cheaper,” he said. “China will likely be cautious in its response, not wanting to spark another tit-for-tat trade war — particularly given its substantially weaker economic outlook compared to when Trump first took office.”

Asia’s struggles came after another up day on Wall Street, where the Dow ended on a second successive record, helped by the choice of Bessent, though US futures were down Tuesday. Bitcoin struggled just above $94,200 after dropping to a six-day low of around $92,600 Monday as the Trump-fuelled rally that had seen it surge around 50 percent to within a whisker of $100,000 ran out of steam. Oil prices were barely moved after Monday’s losses of around three percent that came after an official said Israel’s security cabinet was to decide Tuesday whether to accept a ceasefire in its war with Hezbollah in Lebanon. The stronger dollar was also depressing the commodity.

US, European Union, and United Nations officials have all pushed in recent days for a truce in the long-running hostilities between Israel and Hezbollah, which flared into all-out war in late September.