The pound sterling weakened against the US dollar in early European trading on Tuesday, dropping 0.1% to $1.2551. This move came after President-elect Donald Trump warned of more aggressive tariffs on North American economies, intensifying trade tensions.
US Dollar Index Sees Strong Start
The US Dollar Index (DX-Y.NYB), which measures the greenback against six major currencies, saw a strong start following Trump’s comments that he plans to impose 25% tariffs on all imports from Canada and Mexico. This move was prompted by concerns over illicit drugs being smuggled into the US through Mexico.
Trump’s Tariff Threats
Trump made the remarks via his Truth Social platform, framing the tariffs as a necessary step to curb illegal immigration and drug trafficking. In particular, he accused China of failing to fulfill promises related to the death penalty for fentanyl traffickers.
"Until such time as they stop, we will be charging China an additional 10% tariff, above any additional tariffs, on all of their many products coming into the United States," Trump said.
Canada and Mexico Tariffs
While the tariff threat against China drew attention, it was his comments on Canada that sent shockwaves through the foreign exchange markets. Trump vowed to impose a blanket 25% tariff on all goods from both Canada and Mexico, pledging to sign an executive order on his first day in office.
"As everyone is aware, thousands of people are pouring through Mexico and Canada, bringing crime and drugs at levels never seen before," he said. "This tariff will remain in effect until such time as drugs, in particular fentanyl, and all illegal aliens stop this invasion of our country."
Market Reaction
Despite the initial surge in the dollar, the greenback retraced much of its early gains. Market participants appeared to digest the possibility of Trump nominating Scott Bessent as Treasury secretary, a move that could provide geopolitical stability while aligning with his economic agenda.
In an interview with the Financial Times, Bessent indicated that while tariffs would remain a focus, their implementation would be ‘layered in gradually’.
Pound Remains Unchanged Against Euro
Meanwhile, the pound remained largely unchanged against the euro (GBPEUR=X), trading at €1.1970.
Gold Prices Hold Steady
Gold prices held steady on Tuesday following a significant drop of more than 3% in the previous session. Spot gold was unchanged at $2,613.98 per ounce, while US gold futures were muted at $2,616.90 at the time of writing.
The precious metal suffered a sharp decline on Monday after reports suggested that Israel was nearing a ceasefire agreement with Hezbollah. Additionally, news of Trump’s nomination of Bessent dampened gold’s appeal as a safe-haven asset.
Bullion Traders Monitor Economic Data
Gold is traditionally seen as a hedge against economic and geopolitical uncertainty, with its value typically rising during periods of heightened risk, such as trade wars or military conflicts. However, some market participants see Bessent’s appointment as potentially less negative for the trade war outlook, which could weaken demand for gold, according to UBS analyst Giovanni Staunovo.
Bullion traders are also closely monitoring a series of economic data releases this week, including consumer confidence figures, the latest Federal Open Market Committee (FOMC) meeting minutes, Initial jobless claims, and the Federal Reserve’s preferred inflation gauge, the personal consumption expenditures (PCE) price index.
Oil Prices Continue to Face Pressure
Oil prices continue to face downward pressure, particularly due to the strength of the US dollar, which surged on news of Trump’s threats to impose import tariffs on China, Canada, and Mexico. The stronger dollar undermined demand for oil, making it more expensive for holders of other currencies.
Additionally, the risk premium on oil remains a key concern, particularly in light of escalating tensions between Russia and Ukraine. Moscow’s threats of nuclear retaliation in response to Kyiv’s use of Western-supplied long-range missiles have added to the uncertainty in the global oil market, keeping prices volatile.
FTSE 100 Opens Lower
In broader market movements, the FTSE 100 (^FTSE) opened lower, losing 0.5% to 8,248.36 points.