Published by Global Banking & Finance Review®
Posted on January 20, 2025
4 min readLast updated: January 27, 2026
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The U.S. dollar fluctuated as markets reacted to Trump's potential tariffs on Canada and Mexico. FX markets remain volatile amid trade policy uncertainty.
By Chuck Mikolajczak
NEW YORK (Reuters) -The U.S. dollar alternated between gains and losses on Tuesday in a choppy session, as markets grappled with uncertainty surrounding any tariffs President Donald Trump may implement.
Trump told reporters he was thinking about implementing tariffs of around 25% on imports from Canada and Mexico as of Feb. 1 over fentanyl crossing into the country and migrants entering illegally. He also raised the possibility of a universal tariff but said the U.S. was not ready for that yet.
The dollar rose as much as 0.68% earlier in the session as the greenback attempted to bounce back from a sharp decline on Monday. Trump's first day in office passed with no specific plans on tariffs and officials said any new taxes would be imposed in a measured way, a relief for trade-exposed currencies.
"Volatility is clearly back in a big way, and after the relatively calm term of Joe Biden, FX markets are on a hair trigger for any tariff talk from the Trump administration," said Helen Given, FX trader at Monex USA in Washington. "Trump's proposed tariffs, though, are right now still just that - proposals."
"Traders are trying to get ahead of the risk of tariffs on Mexico and Canada, but until such actions materialize, trying to hedge around them is going to keep markets very choppy, and we've seen that price action today."
The dollar index, which measures the greenback against a basket of currencies including the yen and the euro,rose 0.01% to 108.00 after dropping 1.24% on Monday. After hitting a more than two-year high of 110.17 last week, largely on anticipation of tariffs, the greenback has shown signs of fatigue and has fallen in five of the past six sessions.
"What you're seeing here, too, is just how crowded long dollar positioning is. All you need is some ambiguity on the tariff front, and you get these kind of moves," said Erik Bregar, director, FX & precious metals risk management, at Silver Gold Bull in Toronto.
The euro was up 0.11% at $1.0425. The EU is also seen as a likely target for Trump's tariff policies. Sterling strengthened 0.04% to $1.2328.
Talking to reporters on Monday, Trump said he would remedy the trade imbalance either through tariffs or by Europe buying more U.S. oil and gas.
A subsequent trade memo directed agencies to investigate and remedy persistent trade deficits. Analysts at Barclays said the memo should be seen as a "blueprint for what to expect next on tariffs," and April 1, when the agency reports are due, will be an important date.
The Canadian dollar weakened 0.17% versus the greenback to C$1.43 per dollar while the Mexican peso was down 0.64% versus the dollar at 20.649.
Economic data showed Canada's inflation rate slowed in December to 1.8%, which could give the Bank of Canada room to cut interest rates again next week at its policy meeting.
Trump's inauguration speech focused on emergencies in immigration and energy and a more expansionist foreign policy, including a pledge to take back the Panama Canal.
Against the Japanese yen, the dollar edged down 0.03% to 155.54.
The yen has strengthened against the dollar in three of the last four sessions, supported by growing expectations the Bank of Japan will raise interest rates on Friday.
Japan's top currency diplomat Atsushi Mimura said at a Reuters NEXT Newsmaker event that a weak yen would increase inflation by boosting import costs. Mimura said the government and the central bank were communicating closely every day through various channels.
Markets are pricing an 86.2% chance of a quarter-point increase.
The dollar strengthened 0.04% against the offshore Chinese yuan to 7.264. Trump has threatened China with tariffs of up to 60% but did not detail any plans on Monday.
Beijing later set a stronger fix for the yuan, suggesting it was still inclined to take steps to prop up the currency.
(Reporting by Chuck Mikolajczak; editing by Barbara Lewis and Rod Nickel)
The dollar has shown volatility as traders react to the uncertainty surrounding Trump's potential tariffs on imports from Canada and Mexico. This uncertainty is causing fluctuations in the currency markets.
In a choppy trading session, the U.S. dollar alternated between gains and losses, rising as much as 0.68% before settling at 108.00 on the dollar index after a significant drop on Monday.
Economic data indicated that Canada's inflation rate slowed to 1.8%, which could provide the Bank of Canada with the opportunity to cut interest rates at its upcoming policy meeting.
The European Union is seen as a likely target for Trump's tariff policies, alongside Canada and Mexico, as he aims to address trade imbalances.
Analysts at Barclays described the trade memo as a 'blueprint' for what to expect next regarding tariffs, indicating that it outlines the administration's approach to addressing trade deficits.
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