Sterling holds steady as Trump triggers currency swings

By Harry Robertson

LONDON (Reuters) – The pound was little changed on Tuesday, relatively unscathed after a threat from U.S. President-elect Donald Trump to ramp up tariffs on Canada, Mexico and China sparked volatility in currency markets.

Sterling initially lost ground after Trump’s comments, reflecting its position as a “risk-sensitive” currency that tends to fall at moments of economic uncertainty. But it later perked up and was last 0.1% higher at $1.2587.

The euro was roughly flat against the pound at 83.55 pence.

Trump on Monday evening in the United States said he would impose a 25% tariff on imports from Canada and Mexico until they clamped down on drugs, particularly fentanyl, and migrants crossing the border.

He separately outlined “an additional 10% tariff, above any additional tariffs” on imports from China. The dollar index climbed although later gave up its gains, while the Canadian dollar and Mexican peso slid around 1% and 2% respectively.

Derek Halpenny, currency strategist at Japanese bank MUFG, said Britain’s minor trade surplus with the United States meant it could escape Trump’s ire.

“The UK 12 month surplus – U.S. deficit – is very small at just 4.6 billion pounds ($5.79 billion) and hence Trump is unlikely to focus greatly on the UK-U.S. trade imbalance,” he said, although he added tariff measures on the euro zone could also hurt Britain.

These factors could help contain GBP (pound) depreciation if the trade conflict escalates in the new year, although the risks remain skewed to the downside indirectly via weakening growth in the euro zone and globally that would see GBP suffer.

The pound on Friday fell to a six-month low of $1.2475 in the wake of weak UK retail sales data, which raised the prospect of deeper Bank of England rate cuts.

Sterling has also suffered as the dollar has climbed in the wake of Trump’s victory, with his tariffs expected to support the U.S. currency next year.

($1 = 0.7944 pounds)

(Reporting by Harry Robertson; Editing by Mark Potter)