Dollar Rebounds as Trump Warns of More Tariffs, Euro Holds Gains

The U.S. dollar regained some losses on Wednesday but remained near a three-month low after President Trump reiterated plans for reciprocal tariffs in his speech to Congress. New 25% tariffs on imports from Mexico and Canada, along with increased duties on Chinese goods, took effect on Tuesday, prompting immediate retaliation from Canada and China, while Mexico plans to announce its response on Sunday.

The dollar found some support as investors assessed the impact of trade tensions on inflation. Meanwhile, the euro hit its highest level since November 13 before slightly retreating, having surged 1.3% on Tuesday following Germany’s proposed €500 billion infrastructure fund and potential revisions to debt rules. Analysts believe further adjustments to Germany’s fiscal policies and increased defense spending could strengthen the euro further. Trade tensions also weighed on U.S. stock markets, adding to global economic uncertainty.

CONTENT:

• Trump’s Tariffs Shake Markets as USD Rally Unravels

Dollar Rebounds as Trump Warns of More Tariffs, Euro Holds Gains

The U.S. dollar recovered some of its recent losses on Wednesday but remained near a three-month low after President Donald Trump reiterated his stance on reciprocal tariffs during his first address to Congress since taking office.

Currency markets remained volatile as investors assessed the impact of Trump’s trade policies, including the 25% tariffs imposed on imports from Mexico and Canada that took effect on Tuesday, as well as the doubling of duties on Chinese goods to 20%. In response, both Canada and China implemented retaliatory measures the same day, while Mexican President Claudia Sheinbaum pledged to respond but withheld details, stating she would reveal Mexico’s countermeasures on Sunday.

Despite ongoing trade tensions, the dollar regained some strength after Trump’s remarks about further reciprocal tariffs set to take effect on April 2. The uncertainty surrounding these policies and their potential inflationary effects provided some support to the greenback, according to Christopher Wong, a currency strategist at OCBC.

Meanwhile, the euro remained near its highest level since November 13, having reached $1.0637 earlier in the session before slightly retreating. The common currency surged 1.3% on Tuesday following reports that German political parties seeking to form the next government had agreed to establish a 500 billion euro ($530.95 billion) infrastructure fund and revise borrowing rules. The move signals a significant shift in fiscal policy aimed at strengthening military capabilities and boosting economic growth.

Carol Kong, a currency strategist at Commonwealth Bank of Australia, noted that a substantial adjustment to Germany’s debt brake could further lift the euro. Additionally, any new announcements regarding increased defense spending would likely reinforce expectations for stronger European economic growth, providing further support for the currency.

Trump’s Tariffs Shake Markets as USD Rally Unravels

Trump’s newly implemented tariffs sent shockwaves through global markets, causing sharp declines across U.S. indices before rumors of a potential rollback began circulating. Market volatility has surged, prompting investors to seek refuge in safe-haven assets like bonds and gold, while the earlier rally in the U.S. dollar index has now reversed.

Market Turmoil

European and Asian markets suffered significant losses, with the DAX plunging 3.5%, the CAC 40 dropping 1.85%, and the Stoxx 600 falling over 2%. Japan’s Nikkei index slid to its lowest level since September, and major U.S. indices, spanning large-cap tech stocks to small- and mid-cap benchmarks, erased their post-election gains. The sharp selloff suggested that many investors had expected Trump to reconsider at the last moment—something he eventually hinted at. Reports of a possible rollback have since lifted DAX futures by nearly 2%.

The rapid shifts in policy are increasing market uncertainty, driving investors toward safer assets. Bonds have outperformed equities since Trump took office, while gold allocations have risen as traders brace for further instability.

Weakening Earnings Outlook

Despite a strong U.S. earnings season, with 75% of companies surpassing profit expectations and the S&P 500 posting 18% earnings growth—the highest since Q4 2021—future outlooks have turned pessimistic. Major retailers like Target and Best Buy warned that Trump’s tariffs would push prices higher for American consumers. However, with inflation already weighing on household budgets, companies have limited ability to pass costs on, further straining earnings forecasts. The tariffs appear as detrimental to U.S. businesses as they are to foreign economies, undermining global economic stability.

Dollar Rally Collapses

The dollar failed to withstand the latest tariff-driven market turmoil, with the dollar index tumbling nearly 1% and breaking below the key 38.2% Fibonacci retracement level of Trump’s post-election rally. Meanwhile, the euro surged past 1.06, entering a medium-term bullish phase after overcoming key resistance from the dollar’s decline. The British pound is now testing the 200-day moving average resistance, while the Canadian and Australian dollars have seen only modest rebounds due to ongoing trade tensions and a weaker global growth outlook.

Additionally, Saudi Aramco’s dividend cut, coupled with OPEC’s decision to restore oil output, signals Saudi Arabia’s intention to maximize crude sales to replenish reserves, reinforcing short-term bearish sentiment for oil prices.

Upcoming Market Focus

Investors will closely watch the U.S. ADP employment report, along with PMI and ISM data from both the U.S. and Europe. While European markets may overlook weak data on expectations of a rebound driven by U.S. economic instability, any signs of economic weakness in the U.S. could further dampen risk sentiment and weigh on market appetite.