Donald Trump’s presidency kicks off with tariff uncertainty

Donald Trump’s tariff plans spark market volatility, boosting the dollar while pressuring the loonie and peso. High tariffs risk inflation and global market declines, with tax cuts offering potential relief.

By Ahmed Azzam | @3zzamous | 21 January 2025

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  • The dollar strengthened as the loonie and peso weakened.

  • Markets reacted as Trump delayed immediate action on China.

  • High tariffs could fuel inflation and pressure global equities.

Donald Trump assumed office as the next U.S. president with characteristic fanfare, but his inauguration left a significant question unanswered: his administration’s tariff policy. While specifics remain unclear, the potential global implications are already evident.

Tariff impact and inflation risks

Proponents of tariffs argue that strategic levies can avoid spurring inflation, as the burden would largely fall on foreign exporters and currency adjustments. However, even a one-time increase in import prices could trigger secondary effects, leading to sustained inflationary pressures in the U.S. economy.

Dollar strength and global market reaction

The dollar gained momentum after Trump reiterated plans to impose 25% tariffs on Canada and Mexico by February 1. In contrast, the Canadian dollar and Mexican peso fell sharply. Meanwhile, the Hang Seng Index rallied on a temporary reprieve as Trump postponed immediate action against China.

Hedge funds have begun recalibrating their positions, with some returning to bullish dollar option trades. The Canadian dollar initially showed resilience, benefiting from a broadly weaker greenback, but optimism quickly faded when Trump emphasized border security concerns and labeled Canada a “very bad abuser.”

Early presidential actions and policy pledges

Trump wasted no time enacting his campaign promises. He declared national emergencies on migration and energy, revoked 78 executive orders from the Biden administration, and announced U.S. withdrawals from the World Health Organization and the Paris Agreement.

The tariff domino effect

If Trump pursues an aggressive tariff regime — including 25% on Canada and Mexico, 60% on China, and 10% to 20% on other nations — the repercussions could be significant. Currencies such as the yuan, global bonds, and non-U.S. equities could face downward pressure, alongside commodity prices.

The strengthening dollar, coupled with rising U.S. Treasury yields, could exacerbate the impact on equity markets, particularly in the U.S. However, expectations of corporate tax cuts to offset tariff fallout may help limit damage to earnings and investor confidence.

Balancing act for economic policy

High tariffs may generate revenue, enabling reductions in corporate and individual income taxes. While this could alleviate some negative impacts of elevated import costs, it risks fueling inflationary pressures, particularly in sectors reliant on international trade.

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