The imposition of tariffs by Trump could lead to a volatile currency market.

• On Monday, Trump announced that he would sign an executive order on Jan. 20 imposing a 25% tariff on all goods originating from Canada and Mexico, potentially breaching the terms of a regional free trade agreement.
• The former president, who has previously praised tariffs as the most beautiful word in the dictionary, announced plans to increase tariffs on all Chinese products entering the U.S. by an additional 10%.
• The rise in the U.S. dollar against the Mexican and Canadian dollars following the announcements was more than 2% and four-year high, respectively.

The implementation of additional tariffs on China, Canada, and Mexico by President-elect Donald Trump on the first day of his presidency will likely cause a significant shift in currency markets, strategists caution, emphasizing the importance of investors being aware of the potential consequences on foreign exchange rates.

On Monday, Trump announced that he would sign an executive order on Jan. 20 imposing a 25% tariff on all goods originating from Canada and Mexico, potentially breaching the terms of a regional free trade agreement.

The former president, who has previously praised tariffs as the most beautiful word in the dictionary, announced plans to increase tariffs on all Chinese products entering the U.S. by an additional 10%.

The rise in the U.S. dollar against the euro and yen following the announcements was more than 2%.

Kamakshya Trivedi, head of global foreign exchange, interest rates and emerging markets strategy research at, stated that investors should prepare for heightened FX volatility.

The U.S. dollar index remained unchanged at 106.79 at midday London time on Tuesday, despite investors welcoming Scott Bessent as Trump's pick for U.S. Treasury chief in the previous session.

The euro and pound sterling were both trading slightly higher against the dollar.

We will have to adjust to the unpredictable fluctuations in FX markets due to the fact that currencies are a significant response to tariff announcements, as Trivedi explained on CNBC's "Street Signs Europe" on Tuesday.

Goldman's Trivedi advised investors to anticipate significant fluctuations in currency markets in the near future, as well as in the long run, given that tariffs are likely to remain a significant aspect of Trump's second term in office.

Trivedi stated that investors face uncertainties regarding the extent to which Trump's tariffs can be used as a negotiating tool, whether they reflect a "maximalist" stance, or if the impact of tariffs has already been factored into financial markets.

Trivedi believes that an increase in tariffs, particularly on China, will lead to a stronger dollar response on a broad scale.

'A large bargaining stick'

Despite some of his campaign promises, the former president's tariff announcements on Truth Social were lower. However, strategists are cautious about the possibility of additional announcements and the potential for retaliatory measures.

Trump has previously proposed imposing a 20% tariff on all imported goods into the U.S., with a maximum tariff of 60% on Chinese products and up to 2,000% on vehicles built in Mexico.

According to Luca Paolini, chief strategist at Pictet Asset Management, the market expects the ongoing trade war to be a protracted negotiation process, with the U.S. likely to gain something while China, Europe, and Mexico may have to make concessions.

"The possibility of Trump implementing significant tariffs will result in a lot of pressure in China and Europe, and we know how this will end," he stated.

ING strategists warned Tuesday that investors should not underestimate the impact of Trump's tariff threats on currency markets, even if they are seen as a negotiating tactic before his inauguration in January.

ING's Chris Turner cautioned against dismissing the market impact of tariffs as grandstanding, as most in the market assume that Trump will use them as a large bargaining stick to tighten US border controls.

If 25% tariffs were implemented in Mexico, the USD/MXN exchange rate would be 24/25 instead of 21. It is believed that the currencies of Mexico and Canada will face a more challenging Trump 2.0 than they did during his first term.

Cautious outlook

Strategists at Citi anticipate that the incoming Trump administration will employ tariffs as a negotiating tactic.

Citi's global head of emerging markets strategy, Luis Costa, stated on CNBC's "Squawk Box Europe" on Tuesday that they are still cautious, acknowledging that one headline can cause the Mexican peso to fluctuate by 1.5% to 2% overnight.

It is evident to us that the Trump administration will employ tariffs as a significant tool in negotiations with Mexican President Claudia Sheinbaum's government. However, it is likely that this is more about negotiation than imposing tariffs.