Last midnight on the night of Feb 4, 2025, a 10% “blanket” tariff on Chinese goods went into effect, escalating the ongoing China trade war. It was followed just minutes later by a series of targeted measures against the US. Those include export controls of key rare earth metals, tariffs on electric trucks (such as Tesla’s Cybertruck that Elon Musk has been promoting in China), and entry taxes on US fossil fuels.
With both sides slapping on tariffs, the trade war between the world’s two largest economies… well, not starting, but more like taking on new intensity, people are wondering about the the effect of the U.S.-China trade war on Forex. The US had, in conjunction with the EU, already applied tariffs and trade restrictions against the Asian giant for the last several years. China’s targeted response supposes a new approach from the last time Trump was in office.
As of mid-2025, the global economy is feeling the ripple effects of this intensified trade conflict. Both the U.S. and China have continued to implement new rounds of tariffs, which has led to significant shifts in currency values and trade flows. The U.S. dollar, in particular, has seen fluctuations as a result of these tariffs, affecting forex traders’ strategies. Meanwhile, China’s ongoing export control of rare earth metals has heightened concerns over future global supply chain disruptions, while tariffs on U.S. tech companies and fossil fuels continue to strain relations. As both countries grapple with these trade policies, the forex market remains highly volatile, with traders keenly watching for any changes that might affect global currency markets.
What the Latest Developments Mean
Markets were uncertain about how to react in the current China trade war tariff environment. Initial weakness in the Euro was erased in a matter of hours. Gold hovered near highs, but then stepped back. European equity markets fluctuated. It all points to an uncertain situation in the markets, as some tariffs get applied and others do not.
But, as discussed yesterday, it seems that now that Trump has proven to be serious about applying tariffs, Canada and Mexico were able to come to an agreement that postponed the application of the levies. Unsurprisingly, it’s the countries with slow (or slowing, as the case of Mexico with 0.6% Q4 GDP growth) economic growth that are more willing to offer concessions to avoid tariffs. That is something to keep in mind as Trump has talked about targeting the EU (Q4 growth rate of 0.0%) with tariffs.
As of mid-2025, the U.S.-China trade war continues to evolve, with new developments taking shape. While the U.S. has reached temporary tariff agreements with Canada and Mexico, the focus is now shifting to potential tariffs on the EU, as President Trump threatens further action. In the forex markets, this uncertainty continues to drive volatility, with the Euro remaining under pressure due to concerns over potential tariffs. Meanwhile, gold remains a favored safe haven, with traders eyeing geopolitical risks as key drivers of market sentiment. As negotiations between the U.S. and major trading partners continue, the market remains highly sensitive to tariff-related news, and forex traders are adapting to an environment of increased unpredictability.
Gauging the Market Reaction
The “delay” in tariff application fits Trump’s pattern of holding them “in reserve” as a threat. That might help with his negotiation tactics, but leaves a lot of market uncertainty. Traders have to operate with the possibility of tariffs being snapped in place at any time. Traders really don’t like having to operate with market-moving events that don’t respond to rational, data-driven incentives.
Under those circumstances, currencies that are potentially subject to tariffs could struggle to gain ground, even if the fundamentals are there to support them. The CAD was already being weakened by the widening interest gap between the BOC and the Fed. But, at some point, presumably, the BOC will stop easing and the Fed will get around to lowering rates. That should cause the loonie to gain, but if there is still a real probability of tariffs being applied due to political (instead of economic) considerations, traders might be hesitant to push the CAD higher.
Looking Beyond Currencies
As the trade war narrows around China, commodities are also in the crosshairs. That means other currencies could end up being collateral damage, such as the Aussie dollar. Although there is no hint of tariffs on Australia, its dollar hit a 5-year lower in the wake of the application of tariffs on China as the trade disruption might imply a drop in demand from Australia’s main exports.
Gold prices are likely to remain elevated given the demand for safe havens, while crude prices have been on the backfoot over concerns of a slowdown in global growth. That’s on top of other measures that the Trump administration could take in an effort to depress the price of crude for domestic reasons.
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