When the US imposes new tariffs, the impact ripples far beyond the shipping docks. Currency markets react swiftly, reflecting changes in trade flows, investor sentiment, and global growth expectations. Some currencies thrive under these tensions, while others quickly lose ground. In this guide, we’ll walk you through which currencies typically strengthen or weaken when the US raises tariffs—and why.
Why Tariffs Impact Currency Markets
Tariffs are a tax on imports, making goods more expensive and disrupting global trade. For currency markets, tariffs don’t just slow trade—they shift where capital flows.
When tariffs rise:
- Emerging markets often suffer, as exports shrink and investors flee riskier assets.
- Safe-haven currencies shine as investors seek protection from uncertainty.
- The US dollar may initially strengthen due to its global reserve status but can show mixed reactions if tariffs spark broader concerns about US growth.
Understanding these patterns helps traders, investors, and businesses anticipate market moves in turbulent times.
Currencies That Typically Weaken When US Tariffs Rise
Emerging Market Currencies Hit the Hardest
Emerging markets are on the front lines when trade tensions escalate. Here’s who gets hurt the most:
- Mexican Peso (MXN): Mexico’s economy is deeply tied to US demand. Higher tariffs can push Mexico toward recession, leading to sharp peso declines.
- Turkish Lira (TRY): As an emerging market currency, the lira suffers under global risk aversion sparked by trade tensions.
- South African Rand (ZAR): Another high-risk currency that weakens as investors pull money from riskier markets.
- Brazilian Real (BRL) and Thai Baht (THB): These currencies often fall alongside broader emerging market sell-offs, as slowing global trade hurts growth prospects.
China’s Special Case: The Managed Yuan
- Chinese Yuan (CNY): The yuan faces direct pressure when tariffs rise, as China’s trade surplus shrinks. However, authorities often intervene to smooth its depreciation, making its movements less volatile compared to other emerging market currencies.
Currencies That Typically Strengthen
Safe-Haven Stars
During tariff-driven uncertainty, investors typically pile into currencies known for their stability:
- Japanese Yen (JPY): A classic safe-haven, the yen often rallies sharply when risk sentiment deteriorates.
- Swiss Franc (CHF): Another favorite among cautious investors, the franc benefits from its reputation for economic and political stability.
The US Dollar (USD): A Mixed Bag
- Initially, the US dollar tends to strengthen as global investors seek liquidity and safety.
- However, the dollar’s reaction isn’t always straightforward. In cases where tariffs severely damage US growth prospects or trigger selling of US assets, the dollar can weaken.
Other Major Economies: EUR and GBP
- Euro (EUR) and British Pound (GBP) can sometimes appreciate against the dollar if investors rebalance away from US assets.
- Particularly during broad-based tariff hikes, portfolio flows can favor Europe and the UK over the US.
Commodity Currencies: Double Trouble
Commodity-linked currencies are particularly vulnerable when tariffs slow global trade:
- Australian Dollar (AUD): As demand for iron ore, coal, and other exports drops, the AUD typically weakens.
- New Zealand Dollar (NZD): Agriculture-heavy New Zealand sees its currency fall as global demand softens.
- Canadian Dollar (CAD): Oil exports and close trade ties to the US mean the CAD can tumble—especially if Canada is directly targeted by tariffs or retaliates.
Quick Reference Table
| Currency | Typical Reaction to US Tariffs | Reason/Context |
|---|---|---|
| MXN, TRY, ZAR | Weaken | Export reliance, risk aversion, capital outflows |
| CNY | Weaken (managed) | Trade friction, but managed by authorities |
| BRL, THB | Weaken | Emerging markets, global risk-off sentiment |
| JPY, CHF | Strengthen | Safe-haven flows, global uncertainty |
| USD | Usually strengthen | Reserve status, liquidity, but can weaken if US assets sold |
| EUR, GBP | Can strengthen | Portfolio rebalancing, advanced economy status |
| AUD, NZD, CAD | Weaken | Commodity dependence, global trade slowdown |
Key Takeaways
- Emerging market currencies like the MXN, TRY, ZAR, BRL, and THB are most vulnerable, typically weakening as trade slows and investors flee riskier markets.
- Safe-haven currencies like the JPY and CHF tend to benefit from rising uncertainty.
- The US dollar usually strengthens initially but can face mixed outcomes depending on the broader economic damage.
- Commodity currencies such as the AUD, NZD, and CAD are at risk due to slowing demand for raw materials.
- The EUR and GBP can sometimes strengthen if global investors rotate away from US assets.
Final Thoughts
Tariffs are more than just a trade issue—they’re a major currency event. Emerging markets and commodity-linked currencies typically suffer, while safe-haven assets shine. However, currency reactions can vary depending on the depth and breadth of tariff measures, and the broader market mood.
For traders and investors, watching tariff announcements—and understanding these currency dynamics—can offer a crucial edge in navigating the shifting forex landscape.