Mexican Peso, Canadian Dollar Slide As Trump Threatens 25% Tariffs, Economist Eyes Price Hikes On 'Typical US Breakfast'

The Mexican peso and Canadian dollar weakened on Tuesday after President Donald Trump pledged to impose 25% tariffs on imports from Canada and Mexico starting Feb. 1.

The move, tied to concerns over illegal immigration and drug trafficking, has sparked fears of economic disruption and rising costs for everyday goods.

"We are thinking in terms of 25% on Mexico and Canada," Trump said later on Monday, citing issues with “vast numbers of people” and "fentanyl" entering the U.S.

See Also: Trump Postpones TikTok Ban

Increased Supply Chain Disruptions Or A Bluff?

Trump's tariff proposal could disrupt supply chains, given the scale of U.S. trade with its neighbors. According to ING Group economist Inga Fechner, 15% of all U.S. imports in 2023 came from Mexico, while 13.7% came from Canada.

"About a third of everything the U.S. imports would be affected by unilateral tariffs, potentially disrupting supply chains and impacting the economy significantly," Fechner said.

Mexico's share of U.S. imports exceeds 25% in seven categories, while Canada's share exceeds 25% in 20 categories. These categories include agricultural products, food and beverages, automobiles, metals, wood, and industrial products.

Fechner added that the tariffs could lead to price hikes on everyday goods, including a “typical U.S. breakfast.” Items like coffee, which are already seeing soaring prices, could become even more expensive in the months ahead.

On the contrary, Goldman Sachs economist Alec Phillips questioned the implementation of those tariff threats.

While he said that Trump's comments on Canada and Mexico were "more hawkish than expected," he indicated that similar proposals in the past were not followed through.

Phillips reminded that Trump previously announced plans for tariffs on Mexico in 2019 and pledged to sign necessary paperwork in November 2024 to enact trade measures on Inauguration Day, neither of which materialized.

“Despite Trump's comments, we continue to believe the odds of a 25% tariff on Canada and Mexico are low at 20%. We are lowering our odds of a universal tariff this year to 25%,” Phillips said in a note.

Trudeau Vows Retaliation

Canadian outgoing Prime Minister Justin Trudeau quickly pushed back on Trump's tariff proposal, vowing a robust response.

Speaking at a news conference in Montebello, Quebec, Trudeau warned that Canada would match U.S. tariffs dollar for dollar if they were implemented.

"Canada will respond, and everything is on the table," Trudeau said, adding that the U.S.–Canada relationship remains one of the most successful partnerships globally.

He also highlighted Canada's role as a "safe, secure, reliable partner" for critical U.S. imports like steel, aluminum, and energy.

Trudeau cautioned that if the U.S. turns away from Canada, it may have to source resources from adversarial nations like Russia, China, or Venezuela.

Currencies Plunge As Trade Risks Mount

The Mexican peso weakened 1.2% in the session, with the USD/MXN exchange rate rising to 20.72. The peso has now lost 4% of its value against the dollar since Trump's election victory in November 2024.

The Canadian dollar also struggled, falling 0.7% in its worst daily performance in over a month. The USD/CAD exchange rate reached 1.44 levels, with the currency similarly down about 4% since November.

Despite the currency weakness, equity markets in both countries saw gains. The iShares MSCI Canada Index Fund EWC rose 1.1%, while the iShares MSCI Mexico ETF EWW climbed 1.9%.

Now Read: