How are markets reacting? Here are 3 lessons for traders

By ForexTime

Starting Feb 4th: 25% tariffs on Canada and Mexico; 10% on China
Dollar index (USDInd) returns towards 2-year high around 110.0
Canadian Dollar (CAD) tumbles to weakest against USD since 2003
NZD, AUD – China proxies – lead G10 declines against US dollar
Mexican Peso (MXN) sinks to near 3-year low (since March 2022)
Offshore Chinese Yuan (CNH) down 0.3%; all Asian currencies lower vs. USD
Gold falters from record high; US crude oil pares initial spike
US, European, Chinese stock indexes gapped down
Bitcoin briefly sank below $92k; smaller cryptos see double-digit declines
3 Lessons: Traders must stay alert, have adequate capital, and move fast to seize on potential market opportunities

President Trump is following through on his tariff threats!

Starting 12:01 AM Eastern Standard time (5:01 AM GMT) on February 4th, 2025, the following levies will be imposed on US-bound imports from:

Canada = 25% (except energy products)
Mexico = 25%
China = 10%

Also, President Trump warned that tariffs against the EU “will definitely happen”.

Although POTUS intends to hold talks with Canada and Mexico later today, it would require something dramatic over the coming hours for Trump to reverse his decision before 12:01 AM EST.

The prospects of tit-for-tat trade wars, and a souring global economy, are hurting riskier assets across global financial markets.

How are markets reacting?

February has indeed kicked off with a bang, considering the incoming economy-dampening tariffs:

Currencies:

The US dollar index (USDInd)
- soared back closer to its 2-year high around the psychological 110.0 mark.
- skyrocketed as much as 1.3%, and if it holds, would be its biggest one-day gain since November 2024.
- US dollar is widely seen as a “safe haven”, which helps protects investors’ wealth during times of heightened fear and uncertainty.
- Trump’s tariffs are expected to reignite US inflation.
  – reawakened inflation may prevent the Federal Reserve from lowering US interest rates.
  
  – US dollar tends to strengthen when US interest rates remain higher than its major peers (Euro, UK, Canada, etc.)

Canadian dollar (CAD)
- tumbled to its weakest levels since April 2003.
- USDCAD is climbing 1.5% (stronger US dollar, weaker CAD), getting within a few pips of the 1.4800 level.
- biggest loser among G10 currencies against the US dollar, down 2.2% so far in 2025.

AUDUSD and NZDUSD
- biggest G10 losers vs. USD today
- The Australian Dollar (AUD) and New Zealand Dollar (NZD) are now weaker by 1.27% and 1.37% against the US dollar respectively.
- Antipodean currencies are widely seen as G10 proxies to China, given that the world’s second-largest economy, is the top trade partner for Australia and New Zealand respectively.

All G10 currencies initially weakened by over 1% against the US dollar today …

… except for safe havens Swiss Franc (CHF: down 0.7%), and the Japanese Yen (JPY: down 0.3%) at the time of writing.

Mexican Peso (MXN)
- worst-performing LatAm currency today, down 2.2% against US dollar so far
- 2nd-worst currency in the world against US dollar today (second to the Vanuatu Vatu, down 2.5%), as tracked by Bloomberg
- down 1.7% year-to-date

Chinese Yuan (CNH)
- down 2.2% against US dollar today
- Onshore Yuan (CNY) due to resume trading on Tuesday, Feb 4th – after Chinese New Year break

Metals/Commodities:

Gold
- XAUUSD is holding steady, despite initially falling about 0.5%
- demand for “safe havens” is keeping bullion around its record high around $2800 posted just this past Friday, Jan 31st.

However, with major G10 currencies weakening against the stronger US dollar …