US President Donald Trump is considering a two-step tariff strategy to establish a stronger legal foundation for his “reciprocal” tariff regime. This approach aims to raise funds for proposed tax cuts while focusing on Mexico, China, and Canada, which together made up 42% of total US imports in 2024.
The immediate market response to this news saw the US Dollar index decline by 0.25%, reaching 104.05. Tariffs, which are duties on imported goods, are designed to bolster local manufacturers by making imports more expensive.
While some economists advocate for tariffs as tools to protect domestic industries, others warn of potential long-term price increases and trade wars.
Reshaping Global Trade
What we are witnessing here is an attempt to reshape global trade flows. Trump’s two-step tariff plan is not just about raising funds; it lays the groundwork for a broader recalibration of economic ties. By targeting Mexico, China, and Canada—the three largest sources of US imports—the administration aims to shift the balance of trade while generating revenue to finance further domestic tax cuts. Given that these three nations accounted for nearly half of all goods entering the US last year, the scope of potential disruption is sizable.
Markets did not take long to react to this prospect. The US Dollar index, which measures the currency against six others, dipped 0.25% to 104.05. This suggests investors are concerned about the consequences of a more protectionist stance. A weaker dollar typically makes American exports more competitive but also raises the cost of imported goods. If the depreciation persists, we may see pressure on inflation, particularly for industries reliant on foreign supplies.
Tariffs are, at their core, a tool to tilt the playing field. By raising costs for foreign products, they provide a buffer for domestic manufacturers, allowing them to compete more easily against cheaper alternatives from abroad. Some argue this is necessary to safeguard local jobs and production capacity, particularly in sectors where outsourcing has hollowed out once-thriving industries. Others caution that such measures have broader knock-on effects, lifting prices across the board and straining relations with key trade partners.
Market Volatility And Strategy
For traders in the derivatives space, this presents both opportunities and risks. Any shifts in sentiment surrounding trade policy could trigger volatility in currency markets, particularly for the Mexican peso, Canadian dollar, and Chinese yuan. Short-term speculation on tariff announcements, coupled with responses from affected nations, could create pricing inefficiencies that skilled traders may look to exploit. However, the longer strategy will depend on whether these measures escalate into retaliatory actions or lead to compromises that stabilise exchange rates.
It is worth watching how markets price in potential retaliation. If countries affected by these tariffs impose countermeasures, we may see rapid fluctuations not just in forex markets but also in commodities—especially those linked to North American and Chinese supply chains. In such a scenario, volatility in industrial metals, agricultural goods, and energy markets could become more pronounced, offering further trading opportunities but also heightening downside risks.
For now, the immediate focus remains on how much political capital is behind this potential tariff shift. If momentum builds, pricing in adjustments sooner rather than later may allow traders to stay ahead of sudden market repricing. Conversely, if resistance within Washington stalls implementation, we could see a reversal of the initial market reaction.
