Traders should pay close attention as tariffs and trade policies create both risks and opportunities in the forex market.
How Tariffs Could Impact Currencies
Tariffs are once again dominating headlines in 2025, and they’re shaping up to be a major driver of currency movements. Traders should pay close attention as these trade policies create both risks and opportunities in the FX market.
Back in November, President Trump announced sweeping tariff plans that jolted the markets. An executive order, set to be signed on January 20, will impose a 25% tariff on all goods from Canada and Mexico, a move that could breach existing regional trade agreements. Calling tariffs “the most beautiful word in the dictionary”, the president also pledged to slap an additional 10% tariff on all Chinese imports. For Europe, he warned the EU must address its trade deficit by purchasing large amounts of US oil and gas—or face tariffs on European goods. These announcements immediately sent the US dollar soaring, gaining 2% against the Mexican peso and hitting a four-year high against the Canadian dollar.
Key Currencies to Watch
Canadian Dollar (CAD): The 25% tariff on Canadian exports has significantly weakened the loonie. Political fallout followed, with Prime Minister Justin Trudeau resigning on the back of the tariffs, reflecting the economic and political strain on Canada. This creates a bearish sentiment for CAD, especially against safe-haven currencies like the USD and JPY.
Mexican Peso (MXN): The peso has been under similar pressure, with the 2% drop in November underscoring its vulnerability. Traders may see further downside if U.S.-Mexico trade tensions escalate.
Chinese Yuan (CNY): An additional 10% tariff on Chinese goods has weighed heavily on the USD/CNY, increasing the likelihood of intervention by Beijing to maintain competitiveness. The pair could trend higher as a result.
Euro (EUR): Europe’s exposure to U.S. tariff threats has put downward pressure on the euro. Watch for any retaliatory measures or energy-related disruptions to drive further volatility.
US Dollar (USD): The dollar is expected to remain strong as tariffs boost safe-haven flows. A robust U.S. economy and a less dovish Fed also support its upward trajectory, but traders should be cautious of overvaluation risks.
How to Trade It
Trend Trading: Look for sustained trends in USD pairs. For example, USD/CAD and USD/MXN could see continued upside if trade tensions persist.
Safe-Haven Strategies: Focus on currencies like JPY and CHF, which typically perform well during periods of uncertainty.
Short-Term Volatility: Tariff-related news often triggers sharp, short-lived moves. Consider intraday trades around key announcements.
Hedging: Export-driven currencies like CAD and MXN are vulnerable. Hedging exposure could mitigate downside risks.
Traders should stay agile and keep a close eye on developments, as tariff policies will likely remain a major driver of FX market volatility in 2025. Adapt your strategies to align with the ever-changing landscape and use these moves to your advantage.