In a dramatic escalation of global tensions, U.S.-China trade relations have deteriorated as both nations exchange new tariffs. While Trump delayed tariffs on Mexico and Canada, China faces a 10% U.S. tariff, responding with its own measures on American goods. Amid this uncertainty, markets show volatility: the dollar weakened despite bullish positions, while gold hit a record $2,860/oz, driven by safe-haven demand.

U.S.-China Tariff Battle Heats Up: Market Reactions and Economic Impact
On Monday, U.S. President Donald Trump postponed the decision to impose a 25% tariff on Mexico and Canada for one month, shifting attention to whether a similar delay would apply to the 10% tariff on China. The deadline for the decision passed at 12:01 AM (EST) on Tuesday, making the tariffs official.
As market observers assessed the potential impact of these tariffs, China responded with a countermeasure. The Chinese government announced that it would impose a 15% tariff on less than $5 billion worth of coal and liquefied natural gas imports from the U.S., while crude oil, agricultural machinery, large-volume cars, and pickup trucks would be subject to a 10% tariff. Additionally, new export controls were placed on certain metals.
China also blacklisted several U.S. companies with significant operations in the country, including the owner of Calvin Klein and Illumina Inc. Moreover, it announced an antitrust investigation into Google over alleged violations.
China's countermeasure appears to be carefully calibrated to avoid escalating trade tensions between the world's two largest economies. The affected goods represent approximately 10%-15% of China's imports from the U.S., seemingly aimed at strengthening China's negotiating position before entering discussions.
However, amid growing speculation over Trump's threats of additional tariffs and Beijing's willingness to retaliate further if necessary, market concerns over a potential trade war remain high. The tariffs announced by China will take effect on February 10, and markets will closely watch the anticipated negotiations between Washington and Beijing leading up to that date.
Amid the uncertainty surrounding the trade war, the U.S. dollar closed lower on Tuesday. However, traders are betting that any dip in the dollar will be short-lived, as a potential trade war could trigger a flight to safe-haven assets.
According to the latest data from the Commodity Futures Trading Commission, speculative investors hold approximately $33.7 billion in long dollar positions, close to the highest level since 2019.
There are several reasons to justify bullish bets on the dollar, even when disregarding market noise related to trade policy. The U.S. economy is performing significantly better than other major economies, and the Federal Reserve is expected to ease policy less than its peers this year. These factors form the foundation of traders' long-dollar positions.
On the other hand, tariff-related developments and major data impacting expectations for Fed policy remain key drivers of short-term volatility. Notably, after Trump declared that tariffs on the European Union were inevitable, bets on the dollar reaching parity with the euro increased. However, economists argue that for this to happen, the trade war would need to escalate further.
The tariffs imposed by the U.S. on other countries have the potential to increase inflationary pressures and weigh on economic growth domestically.
Although the tariffs on Mexico and Canada have been postponed for now, market observers estimate that if a 25% tariff were implemented, fuel prices for American drivers could rise by 15 cents per gallon, and according to one industry participant, the cost of building a typical home could increase by as much as $29,000.
If inflationary pressures rise and economic growth comes under strain, questions about the U.S. economy's performance could emerge, potentially weakening the U.S. dollar. Nevertheless, the prevailing belief is that a potential trade war would hurt other economies more than the U.S., maintaining the dollar's strength in the current landscape.
Additionally, as tariffs weigh on growth, the labor market could feel the strain. While it has been gradually cooling, it remains strong for now. However, if a potential trade war deepens the slowdown, the Fed may be forced to reconsider its cautious policy stance.
Tuesday's data showed that job openings in the U.S. fell more than expected in December, hitting a three-month low. The U.S. Bureau of Labor Statistics reported that available positions dropped to 7.6 million from 8.16 million in November, falling short of economists' median forecast of 8 million. This aligns with the ongoing gradual softening of the labor market.
The employment report set to be released on Friday will offer further insights into the labor market and could drive market volatility.

Gold Surges Past $2,860 as Market Turmoil Intensifies
Amid growing concerns over a trade war, rising demand for safe-haven assets propelled gold prices to a new all-time high on Wednesday, surpassing $2,860 per ounce.
The implementation of U.S. tariffs on China, followed by China's retaliatory measures, has heightened market tensions, fueling a flight to precious metals like gold.
Adding to the unease, U.S. President Donald Trump stated during a press conference with Israeli Prime Minister Benjamin Netanyahu on Tuesday, "The US will take over the Gaza Strip." Trump proposed that the U.S. take responsibility for rebuilding the war-torn region. His remarks were widely interpreted as an attempt to displace the local population, further stoking fears of escalating tensions in the region.
Meanwhile, traders continue to assess the potential inflationary impact of the tariffs. Typically, higher interest rates and a stronger dollar weigh on gold's appeal. However, ongoing uncertainty surrounding global trade policy, along with potential geopolitical risks, could continue to support gold prices despite the strength of the dollar.
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