NEW YORK/MEXICO CITY/LONDON: The Mexican peso tumbled over 2 percent to its lowest in nearly three years against the dollar on Monday after the United States imposed 25 percent tariffs on its southern neighbor as part of the first major salvo of new global trade war. Mexican President Claudia Sheinbaum ordered retaliatory tariffs, as did Canada which was also hit, with Prime Minister Justin Trudeau warning Americans that tariffs would have real consequences for them.

The tit-for-tat moves pushed investors to buy the safe-haven US dollar and sell out of exposed currency, stock and bond markets in a bid to limit the damage. Mexico ships almost 83 percent of its exports to the US analysts estimate, trade which adds up to more than a quarter of its gross domestic product (GDP), or annual economic output. “The broad-based and/or durable tariff scenario with 25 percent tariffs across all Mexican products will take the economy into recession,” analysts at Morgan Stanley said in a note to clients.

They predicted a 5-10 percent drop in the peso and with Mexico highly likely to introduce retaliatory tariffs, domestic inflation could shoot up between 1-1.5 percentage points and force the country’s central bank to keep interest rates up. US President Donald Trump’s executive order means the 25 percent tariffs will be applied on Mexican and most Canadian imports from Tuesday without a last-minute deal. China is set to get further 10 percent hit on its goods too.

Trump said Americans could feel “some pain” in the form of higher consumer prices, while the effect of the trade war is expected to be felt far beyond North America. Monday’s market response saw the peso weaken to its lowest level against the greenback since March 2022. It was last down 2.1 percent at 21.1275 to the dollar and options markets were pointing to more volatility in the coming days.

The Mexican currency had strengthened as much as 3.5 percent this year but Monday’s dive took it back into the red. It also comes after it lost almost a fifth of its value last year due to both tariff and domestic politics concerns. “Full implemented tariffs with staying power don’t appear to be in the price of key markets,” JPMorgan’s analysts said in their first response to the tariffs.

“We expect a relatively tapered 8 percent-12 percent Mexican peso depreciation, as markets are likely to deem it temporary, with USMCA (Tripartite US, Mexico, Canada trade deal) ultimately preserved.”

While the markets in China are closed until Wednesday for the Lunar New Year holidays, the yuan also touched a record low in offshore trading. “North American trade has evolved into an increasingly sophisticated economic engine since NAFTA took effect 31 years ago,” said Alejo Czerwonko, chief investment officer for emerging markets Americas at UBS Global Wealth Management. “A large wrench has just been thrown into its works. If tariffs persist, they could inflict serious economic damage across all participating countries”.

Mexican agricultural and auto-parts producers called Sunday for “dialogue” to head off the trade war prompted by US President Donald Trump’s decision to impose 25 percent tariffs on imports from Mexico and Canada. Mexican President Claudia Sheinbaum meantime said that she was waiting for a response from Trump to her proposal for talks and to form a working group on migration and drug trafficking. She said she would detail her government’s next steps by Monday. The agriculture and auto-parts industries are expected to be among the hardest hit by Trump’s action, which he says is designed to pressure the US’s closest neighbors—and partners in a trade accord—to crack down on migration and drug trafficking. Both Mexico and Canada have announced counter-tariffs. The US is also targeting China with new 10 percent tariffs on top of those already in force.

The US tariffs, slated to take effect Tuesday, will undermine North America’s “competitiveness,” and put millions of jobs at risk, Mexico’s National Auto Parts Industry (INA) and National Agricultural Council (CNA) said in separate statements. Emblematic of the United States-Mexico-Canada Agreement (USMCA) negotiated during Trump’s first term in office, the Mexican automotive industry exported some $36 billion in goods to the United States in 2023, representing 5 percent of Mexico’s GDP, according to Capital Economics. The automotive sector and auto-parts makers support some 11 million jobs in the three countries, according to the INA.

“Weakening this trade... will only reduce the region’s competitiveness and affect stability,” according to the union. The INA says tariffs could add $3,000 to the cost of an average automobile, leading to a drop in overall sales of one million units this year. — Agencies