President Donald Trump’s renewed pledges to slap 25 per cent tariffs on imports from Canada and Mexico on Feb. 1 jolted foreign exchange markets late in the New York trading session, sending currencies from both countries plunging against the U.S. dollar.

The Canadian dollar fell as much as 1.2 per cent and the Mexican peso slid as much as 1.1 per cent to Thursday’s low after Trump told reporters at the White House he would follow through on trade restrictions, which he’d pledged during his inauguration, on Saturday. The Bloomberg Dollar Spot Index erased an early loss to gain as much as 0.2 per cent.

“Continued U.S. dollar strength is the path of least resistance as investors continue to grapple with the uncertain-but-persistent threat of increased tariffs,” said Nathan Thooft, a senior portfolio manager at Manulife Investment Management.

Traders in the $US7.5-trillion-a-day foreign-exchange market have been on edge for weeks about the possibility of steep levies on Canada and Mexico.

The dollar has risen sharply since Trump’s election in November, in large part because investors expect tariffs to bolster the greenback as greater price pressures keep U.S. interest rates elevated. Uncertainty surrounding global trade could also support the dollar as traders seek safety in the world’s reserve currency.

Canadian and Mexican currencies, meanwhile, had been hit by Trump’s threats.

The Canadian dollar lost about six per cent against the greenback last quarter and touched the lowest since 2020 earlier this year. The currency may be dragged down even more, to the lowest in over two decades, if tariffs are 25 per cent, pushing the Bank of Canada to lower interest-rates much further than planned, while pushing the economy into a deep recession.

The loonie may even get close to its all-time record low reached in 2002 in the aftermath of harsh levies and Canada measures in response, according to some strategists at Wall Street.

“Before the announcement the market was already braced for some upside U.S. dollar versus Canadian dollar scenario but that view is now reinforced,” said Sarah Ying, head of FX strategy at CIBC Capital Markets “We don’t think its time to move against the crowd.”

Mexican assets, meanwhile, are bearing the brunt of the blow when it comes to emerging markets. Though the currency held up in January, 2024 was its worst year against the dollar since the global financial crisis as traders anticipated Trump’s return to the White House and amid local political noise.

A blanket tariff on Mexico would see the peso losing 10 per cent of its value against the greenback, according to Deutsche Bank economist Francisco Campos. Money managers are also likely to ditch the nation’s dollar bonds, and expect shares of companies that export to the U.S. to also post losses.

—With assistance from Edward Bolingbroke, Anya Andrianova and Michael O’Boyle.

Bloomberg.com