U.S. Dollar Rises Amid Tariff Escalation, Aussie and Yuan Hit Hard

The U.S. dollar strengthened broadly on Tuesday as tariffs on Chinese goods took effect, prompting immediate retaliation from Beijing and a sell-off in the Chinese yuan and the Australian dollar.

The Canadian dollar and Mexican peso also weakened despite earlier reprieves from U.S. tariffs. The euro dropped, as the European Union found itself in Washington's trade crosshairs.

U.S. President Donald Trump’s administration imposed additional 10% tariffs on Chinese imports starting at 12:01 a.m. ET (0501 GMT). Beijing responded with tariffs on American cars, farm equipment, and energy shipments set to take effect on February 10.

This escalation revived concerns of a prolonged global trade war, with market optimism waning after Trump's last-minute deals with Canada and Mexico.

"Unlike Canada and Mexico, it's clearly more difficult for the U.S. and China to reach an agreement on Trump's economic and political demands," said Gary Ng, senior economist at Natixis. "Even if some issues are resolved, tariffs could remain a recurring tool, adding to market volatility this year."

The Chinese yuan dipped 0.3% to 7.3213 per dollar in offshore trading, recovering from a low of 7.3765 yuan. Official yuan trading resumes Wednesday after the Lunar New Year holiday.

The Australian dollar fell 0.7% to $0.6186, though it remained above Monday's five-month low of $0.60886. The yuan and Aussie often move in tandem, with the latter seen as a liquid proxy for Chinese currency movements.

The Canadian dollar lost 0.4% to C$1.4485 against the U.S. dollar, following a sharp rebound from a 2003-low of C$1.4792 on Monday. The Mexican peso weakened 0.4% to 20.4100 per dollar, recovering from a nearly three-year low of 21.1882.

“Risk sentiment improved after the late announcement, but trade concerns could resurface if there are no signs of progress by the month’s end,” TD Securities analysts noted. “Our tracking of trading uncertainty is rising, suggesting continued market volatility linked to trade disruptions.”

The euro dropped 0.4% to $1.0297, despite recovering from its lowest point since November 2022 at $1.0125 on Monday. The British pound fell 0.4% to $1.24047, even as Trump suggested Britain might be spared from tariffs.

The U.S. dollar rose 0.3% to 155.24 yen.