After weeks of anticipating the risk of a trade war led by the U.S., financial markets will reopen on Monday, facing a new financial reality.
Investors are likely to initially favor the U.S. dollar, driving it to new highs, and may avoid stocks as President Donald Trump follows through on his threat to impose a 25% tariff on Canada and Mexico and a 10% tariff on Chinese goods starting Tuesday.
The mere discussion of tariffs has already strengthened the dollar since Trump’s election. Last week was the best week since mid-November, with Bloomberg’s Dollar Index rising nearly 1%. U.S. stocks fell on Friday, with automobile manufacturers and companies exposed to China leading the declines.
“Trade tensions could escalate in the short term as other countries are politically forced to retaliate or imitate U.S. policies,” said Stephen Jen, CEO of Eurizon SLJ Capital. “In the short run, this should support a stronger dollar and higher U.S. yields.”
The rise of the dollar is driven by the idea that tariffs will spur inflationary pressures and keep U.S. interest rates high, while also harming foreign economies more than the U.S. and increasing the appeal of the U.S. dollar. Foreign currencies suffer as U.S. demand falls for more expensive imports.
