Analyzing Trump's Tariffs: Impacts on the U.S. Dollar and Currency Trading

In recent years, trade policies implemented during U.S. President Donald Trump's previous and current administrations have significantly shaped the global economic landscape. Among the more controversial and protectionist of these policies, the imposition of tariffs on a range of imported goods has had a profound impact on the U.S. dollar and broader currency markets.

In this article, Benzinga explores the impact of Trump’s tariffs on the US dollar, including the immediate and long-term effects on the USD’s valuation, how major global currencies responded to these developments, and the implications for currency traders and investors in foreign markets. Understanding these factors and how to trade forex strategically will help you operate in a tariff-driven forex market more effectively.

Market Reaction to Trump’s Tariff Announcement

The introduction of tariffs by the first Trump administration generated swift and notable reactions in currency markets. Initially, the U.S. dollar experienced upward momentum as market operators sought the security of a stable currency amidst growing economic uncertainty. This was particularly evident when tariffs targeted major U.S. trade partners, such as China, Mexico and Canada, leading to notable depreciation in the Chinese yuan (CNY), Mexican peso (MXN) and Canadian dollar (CAD) relative to the greenback. 

However, while the US dollar strengthened in the short term, its long-term trajectory was more complex. Extended trade tensions, retaliatory measures and shifting global supply chains introduced increased forex market volatility and USD instability. As uncertainty persisted, the dollar's gains were tempered by concerns about an economic slowdown and inflationary pressures. Furthermore, retaliatory tariffs from affected nations led to unpredictable shifts in trade flows, contributing to currency market instability.

When the Biden administration took over, it maintained some tariffs while modifying others, and the ongoing trade tensions, especially between the U.S. and China, continued to influence Chinese yuan and U.S. dollar fluctuations. In addition, global economic concerns, such as supply chain disruptions and geopolitical events, kept the U.S. dollar in high demand as a safe-haven asset, reinforcing some trends seen during the preceding Trump administration.

In the early months of President Donald Trump's second term, the administration swiftly reintroduced aggressive trade policies, notably imposing a 25% tariff on imports from Canada and Mexico on Feb. 1, 2025, to take effect on the 4th. On the 4th, President Donald Trump then imposed a 10% tariff on Chinese imports after coming to a last-minute agreement with Canada and Mexico to delay the tariffs by 30 days. 

These measures have led to significant volatility in the foreign exchange market as participants react to tariff-related news and the risk of potential disruptions in trade relations with the US’s main trading partners. The chart below shows that the Canadian dollar and Mexican peso have faced notable downward pressure due to anticipated economic slowdowns resulting from reduced export competitiveness. At the same time, safe-haven currencies like the CHF and JPY have appreciated relative to the USD. These currency movements reflect general apprehension in the forex market about the broader economic implications of renewed protectionist policies in the US.

Four-hour candlestick exchange rate charts for the USD/JPY and USD/CHF pairs shown on the left, with the USD/CAD and USD/MXN pairs shown on the right. The rightmost two charts display a sharp spike in the forex market on the day trade tariffs were announced against Canada and Mexico, while the leftmost charts show the subsequent appreciation of the JPY and CHF safe-haven currencies. Source: MetaTrader5

The Trump administration's tariffs on Chinese goods have also contributed to market uncertainty. The prospect of escalating trade tensions with China has prompted investors to seek safe-haven assets as a trade war and forex market volatility loom, strengthening the U.S. dollar against a basket of global currencies. This trend underscores the dollar's role as a refuge during geopolitical and economic instability.

Overall, the reimplementation of trade tariffs under President Donald Trump's renewed "America First" agenda is notably affecting the forex market. These policies have significant implications for relative currency valuations and global trade dynamics.

How Tariffs Affect Currency Markets

Tariffs function as taxes on imported goods, directly increasing their cost for domestic consumers and businesses. This can lead to higher prices, reduced consumer spending and shifts in global trade dynamics. Historically, trade barriers have created market volatility as traders and investors adjust to anticipated economic consequences.

For example, during the U.S.-China trade war, the imposition of tariffs triggered significant fluctuations in foreign exchange markets. Initially, the U.S. dollar strengthened due to investor risk aversion. As the trade dispute escalated and its economic toll became evident, pressure mounted on the dollar, and the Chinese government used measures such as currency devaluation to offset tariff impacts. 

Similar patterns were observed with the Mexican peso and Canadian dollar, which faced downward pressure amid uncertainty over renegotiations of the North American Free Trade Agreement (NAFTA), later replaced by the U.S.-Mexico-Canada Agreement (USMCA).

In recent years, global trade policy has remained a key factor influencing currency markets. The Biden administration maintained a strategic stance on tariffs, particularly against China, while negotiating trade agreements with European and Asian partners. Ongoing trade tariff developments under the new Trump administration will continue to play a key role in relative currency valuations and forex market movements.

Inflation Factors and the Impact on Fed Policy

One of the most significant ways tariffs influence a nation's economy is through their impact on inflation. By raising the cost of imported goods, tariffs contribute to upward pressure on prices, complicating monetary policy decisions by the nation’s central bank.

In the US, higher inflation often leads the Federal Reserve (Fed) to consider maintaining or increasing interest rates to curb rising prices, thereby strengthening the dollar. However, if trade-induced economic slowdowns worsen, the Fed may opt for rate cuts to stimulate growth, potentially weakening the dollar.

During Trump’s past and current tariff regimes, inflationary pressures fluctuated based on the sectors affected by trade policies. While some domestic industries benefited from protectionist measures, consumers faced higher prices on goods reliant on imported components. The Fed must carefully balance these dynamics when setting interest rates.

More recently, inflation has emerged as a dominant concern due to pandemic-related supply chain disruptions, increased government spending and rising energy costs. The Fed adopted an aggressive approach to managing inflation, with multiple rate hikes in 2022 and 2023. While tariffs are no longer the primary driver of inflationary concerns, their effects persist in specific industries, influencing trade balances and monetary policy considerations.

Since 2023, the Federal Reserve has transitioned from an aggressive tightening cycle to cautious easing in response to shifting economic conditions. After maintaining interest rates at a peak of 5.25% – 5.50% to combat inflation, the Fed implemented its first rate cut in September 2024, followed by another in December, bringing rates down to 4.25% – 4.50%. These downward rate adjustments were driven by moderating inflation and slowing economic growth.

In early 2025, the Fed’s FOMC held rates steady, emphasizing a data-driven approach amid persistent inflation concerns and economic uncertainty. This policy shift reflects the Fed's balancing act between controlling inflation and sustaining economic stability. Still, the new Trump administration’s swiftly reintroduced aggressive trade policies have led to immediate volatility in foreign exchange markets. Inflation is expected to rise in response, which could, in turn, provoke a tightening move by the Fed.

The U.S. Dollar as a Safe-Haven Currency

In times of economic uncertainty, the U.S. dollar often serves as a safe-haven asset, attracting investors seeking stability and liquidity. This behavior was particularly evident during tariff escalations when global markets faced heightened volatility and traders and investors moved capital into dollar-denominated assets as a precautionary measure.

The dollar's safe-haven status is important for forex trading and risk management. Traders and investors frequently adjust their portfolios to incorporate more U.S. dollars in response to forex market turbulence, taking advantage of its relative stability. Central banks worldwide also maintain substantial dollar reserves, reinforcing the US currency’s dominant role in global finance.

This trend has continued in recent years, with geopolitical tensions, inflationary concerns and global recession risks further solidifying the dollar’s position as the go-to safe-haven currency. Even as trade policies evolve, the dollar remains a preferred asset during economic distress.

Trading Strategies in a Tariff-Driven Market

Operating successfully in the forex market amid tariff-induced volatility requires a strategic approach and sound risk management techniques. Currency traders must implement various forex trading strategy techniques to mitigate their risk while remaining sufficiently exposed to capitalize on market fluctuations.

For investors in foreign markets, one of the more effective strategies is prioritizing safe-haven currencies, such as the U.S. dollar, Swiss franc (CHF) and Japanese yen (JPY), which tend to perform well during periods of economic uncertainty.

Hedging strategies also play a key role in managing currency risks, especially for US corporations with foreign operations. Hedgers may use options and forward and future contracts to protect against adverse currency movements. Closely monitoring policy changes and economic indicators allows all forex market participants to anticipate market shifts better and adjust their positions accordingly.

Since Trump's second presidency, new economic challenges – such as post-pandemic recovery, supply chain disruptions and ongoing trade negotiations – have continued to influence currency market activity. Traders, investors and hedgers alike must remain adaptable and stay informed about global trade policies and central bank responses to operate effectively in the forex market.

Overall, the tariffs introduced during Trump's two presidencies have far-reaching effects on the U.S. dollar and global currency markets, creating opportunities and challenges for traders and investors. As global trade policies evolve, understanding the impact of trade tariffs remains vital for forex market participants. Using strategic approaches and staying informed on economic and policy developments, those with foreign currency exposures can better succeed in a tariff-driven market environment.