Trump’s Tariff Policy Could Lead To Trade Wars Between Key Economies -

Trump’s Tariff Policy Could Lead To Trade Wars Between Key Economies

Feb 03, 2025Jeremy ParkinsonFinance0

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As of Friday, the Dow Jones (US30) was down 0.75% (for the week +0.90%). The S&P500 Index (US500) decreased by 0.50% (for the week +1.20%). The Nasdaq Technology Index (US100) is down 0.14% (for the week +2.28%). Stocks gave up an early rally on Friday and declined moderately. The long liquidation in stocks emerged on Friday afternoon when the White House denied a Reuters report that President Trump would delay imposing tariffs against Canada and Mexico until March 1.Relations between longtime allies the US and Canada, which has the world’s longest land border, have reached a new low. Canadian Prime Minister Trudeau said he was imposing tariffs on 155 billion Canadian dollars ($107 billion) worth of US goods. He said tariffs on 30 billion Canadian dollars will take effect Tuesday, the same day as Trump’s tariffs, and duties on the remaining 125 billion Canadian dollars 21 days later. Trudeau’s announcement came just hours after Trump imposed 25 percent tariffs on Canadian and Mexican imports and 10 percent on goods from China, creating the risk of a trade war that economists say could slow global growth and stoke inflation.The tariffs pose a significant threat to the commodity-linked CAD, as they could reduce currency demand and limit foreign exchange inflows. These tariff risks also add to pessimism about Mexico’s economic outlook, especially after its GDP contracted by 0.6% in Q4 2024. Meanwhile, diverging monetary policies between the hawkish US Federal Reserve and Mexico’s central bank, expected to cut rates further to stimulate economic recovery, have narrowed the yield differential, adding pressure on MXN.Equity markets in Europe were mostly up on Friday. Germany’s DAX (DE40) rose by 0.02% (for the week +2.50%), France’s CAC 40 (FR40) closed up 0.11% (for the week +0.97%), Spain’s IBEX 35 (ES35) index fell by 0.41% (for the week +4.00%), and the UK’s FTSE 100 (UK100) closed 0.31% (for the week +2.02%) on Friday. The DAX index closed without significant changes on Friday, setting a new record high. Market participants were assessing key inflation data from Europe and the US and the latest corporate earnings reports. In Germany and France, core inflation came in below forecasts, indicating that price pressures are easing and reinforcing expectations that the ECB will continue to cut rates this year.WTI crude oil prices rose to around $73.8 a barrel on Monday after US President Donald Trump imposed tariffs against Canada, Mexico, and China, raising concerns about possible supply disruptions. However, crude oil prices could face downward pressure in the near term. Imposing tariffs and subsequent retaliatory measures could trigger a wider trade war, hurting global economic growth and reducing energy demand.Asian markets were predominantly up last week. Japan’s Nikkei 225 (JP225) fell by 2.59%, China’s FTSE China A50 (CHA50) gained 0.44%, Hong Kong’s Hang Seng (HK50) rose by 0.91%, and Australia’s ASX 200 (AU200) posted a positive 1.21% for the week. Hong Kong stocks fell 1.3% in early trading at the start of the new month, reversing gains from the previous three sessions when trading resumed after the New Year holiday amid widespread sector losses. Over the weekend, investors reacted as Donald Trump imposed sweeping tariffs against several countries, including China. Meanwhile, Beijing announced plans to challenge Trump’s decision at the WTO and take other countermeasures, adding to fears of a trade dispute between the two countries.The Australian dollar fell about 2% to below $0.61, hitting its lowest since April 2020. New US tariffs heightened fears about a global trade war, triggering a sell-off in risk assets. While Australia has not been directly impacted by the new US tariffs, its economy, which relies heavily on exports and free trade, remains vulnerable to disruptions in global trade. Meanwhile, data showed a 0.1% decline in Australian retail sales for December, the first drop in nine months. The slowdown has further supported expectations of a dovish stance by the Reserve Bank of Australia, with many analysts predicting rate cuts could begin as early as this month.On Monday, the New Zealand dollar fell by 2% to US$0.553, its lowest level since March 2020, as the threat of a global trade war weighed on risk sentiment. In addition, the Kiwi weakened further after China’s manufacturing PMI fell below expectations as China is New Zealand’s key trading partner. The prospect of further rate cuts by the Reserve Bank of New Zealand also weighed on the currency. The market is pricing in a 50 bps rate cut to 3.75% at the February 19 meeting and forecasts a rate cut to 3% over the next 12 months.Indonesia’s annualized inflation rate for January 2025 fell to 0.76% from December’s 1.57%, the lowest since March 2000. Core inflation, which excludes managed and volatile food prices, accelerated to an 18-month high of 2.36%, beating growth estimates of 2.30%.