The first day of the comprehensive trade war: the US dollar actually fell

As U.S. President Trump fulfills his promise to impose large-scale tariffs on Mexico and Canada, global markets have reacted swiftly.

On Tuesday, the dollar experienced a significant decline, hitting its lowest point in a week.

The trade war triggered by the U.S. may be shaking the dollar's long-held status as a safe-haven currency, as investors flock to other safe-haven assets. The Swiss franc rose 0.8% against the dollar, and the yen increased by 0.5%, leading gains among other currencies in the G10. Gold prices were also supported by safe-haven buying, and as of the time of writing, gold prices retreated to $2907.48 per ounce.

Sarah Ying, head of foreign exchange strategy at Canadian Imperial Bank of Commerce Capital Markets, stated:

The market is considering the negative impact of tariff uncertainty on the U.S. economy, and the traditional safe-haven buying of the dollar is being questioned. We are in a thematic shift: the market is moving from a systematically bullish outlook on the dollar to a bearish one.

Against the backdrop of a visibly weakening U.S. economy, the escalation of the trade war has intensified concerns about the U.S. economic outlook. The U.S. consumer confidence index in February recorded its largest decline since August 2021, reflecting consumer worries about persistent high inflation and economic prospects.

An increasing number of investors are betting that the Federal Reserve will resume interest rate cuts in the coming months, which could further weaken the dollar. Deutsche Bank believes that the reasons for the dollar's decline are the "speed and scale of global changes" and the "uncertainty surrounding the U.S. economic outlook." Brent Donnelly, president of Spectra FX Solutions LLC, expressed a more direct view:

The market is starting to believe that the era of American exceptionalism is over. The U.S. position in the world is under threat.

Meanwhile, Goldman Sachs strategists have a different perspective, arguing that investors do not fully believe that the tariffs imposed on Mexico and Canada will last long-term, and that the market reaction reflects more concerns about the narrative of "poor U.S. performance."

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