US dollar weakens amid rising ‘Trumpcession’ fears, as tariffs kick in – business live

Rachel Reeves will say she wants to speed up defence procurement and ensure the UK’s small and medium-sized businesses can benefit, when she addresses manufacturers this afternoon.

The chancellor has already pledged to ramp up defence spending to 2.5% of GDP, paid for by slashing the aid budget, and to rewrite the rules of Labour’s National Wealth Fund so that it can invest in defence.

But with the US tearing up the transatlantic alliance, 2.5% of GDP is only expected to be a staging post, our economics editor Heather Stewart reports.

In a “fireside chat” this afternoon at manufacturing trade body Make UK’s annual conference, Reeves will promise to cut red tape that slows down defence procurement, and open up more contracts to smaller firms.

She is expected to say,

“For too long politicians of all stripes have ducked and dodged the decisions need to fire up Britain’s industrial base and unleash its potential to keep the country safe.

We’re changing that by increasing defence spending and making defence a cornerstone of our industrial strategy to create jobs, drive growth and meet emerging global threats head on.”

Defence was already earmarked as one of the industries to be backed by the government’s industrial strategy – expected to be published around the time of the spending review, in June.

But the escalating demands for spending will raise questions about how other sectors expecting to receive government support are now likely to fare. The Ministry of Defence is notorious in Whitehall for delivering projects late, and drastically over budget.

It’s possible that the spending cuts being pushed by billionaire businessman Elon Musk’s so-called “department of government efficiency” (Doge) could push the US economy into a downturn.

Musk had suggested he could cut $2 trillion from federal spending, which would be almost a third of the $6.75 trillion spent by the US government in the 2024 fiscal year, or 23% of US GDP that year.

As government spending is tied up with consumer and business spending, such reductions would have a significant impact on the economy (as Y = C + I + G + NX, see below*.)

BUT, the US government may tamper with this way of calculating GDP.

Howard Lutnick, the US commerce secretary, said on Sunday that government spending could be separated from gross domestic product reports.

Lutnick told Fox News Channel’s Sunday Morning Futures:

“You know that governments historically have messed with GDP.

They count government spending as part of GDP. So I’m going to separate those two and make it transparent.”

* – this Keynesian cross model states that aggregate output = consumer expenditure, plus investment, plus government spending, plus net trade (exports minus imports).

European countries are wondering if they will be next to be hit by US tariffs.

Germany’s economy minister has said today that Europe will respond in a united and resolute way if US president Donald Trump were to impose tariffs on EU products – something he threatened to do last week.

Robert Habeck says in a statement:

“Germany supports the EU Commission’s approach of working with the U.S. government to find a negotiated solution. But the EU will not be pushed around. If President Trump imposes the announced tariffs on EU products, we will react with unity and self-confidence.”

The US dollar is weakening today, amid growing concerns that Donald Trump’s policies could push America’s economy into a contraction, and possibly a full-blown recession.

The dollar index, which tracks the greenback against a basket of rival currencies, has dropped by 0.44% today, as traders anticipate that a trade war will drive up US inflation and hurt its economy.

Sterling has risen 0.2% to $1.2724 against the dollar, its highest level since 17 December. The euro is up 0.3% at $1.052.

The dollar’s weakness comes as markets now expect the US Federal Reserve to cut interast rates three times this year. In January and February, only one or two cuts were priced in.

Investors are jumpy after a closely watched gauge of the US economy weakened yesterday.

The Atlanta Federal Reserve’s GDPNow model now estimates US GDP will shrink at an annualised rate of 2.8% in January-March, the equivalent of a 0.7% quarterly decline in activity. That helped to prompt yesterday’s losses on Wall Street.

That helped to prompt yesterday’s losses on the US stock market, even though the Atlanta Fed GDPNow can be volatile.

Kyle Rodda, senior financial market analyst at Capital.com, explains:

Wall Street tumbled off the back of the news, while the US Dollar declined as market participants began to contemplate the risks of a US recession. While much of the change is due to mechanical factors in the way GDP is calculated, a deepening trade deficit along with signs of weaker consumer spending and business activity has driven the Atlanta Fed’s GDP Nowcast to -2.8%.

Subsequently, the markets have shifted forward expectations of the next Fed rate cut to June, with May increasingly looking like a “live” meeting.

Talk of a “Trumpcession” has been growing in recent days, after the latest trade data last week showed a surge of imports as businesses tried to avoid new tariffs.

Manufacturing data yesterday showed a slowdown in US factory growth in February, with employment levels and new orders both contracting.

An index of US consumer confidence hit an eight-month low last month, while US retail sales dropped by the most in nearly two years in January.

A CBS News poll released on Sunday showed that 49% of Americans disapprove of president Trump’s handling of the economy.

Stephen Innes, managing partner at SPI Asset Management, says talk of a ‘self-inflicted “Trumpcession.”’ is on the rise:

Already queasy from a fading AI-driven rally, Wall Street is now staring down a worsening cocktail of Trump’s tariff fury, stretched equity valuations, and the cold, hard realization that the U.S. economy may be losing steam. Meanwhile, across the pond, Europe—long the ugly duckling of global markets—is suddenly the belle of the ball.

While America grapples with an economic hangover, European stocks are ripping higher, fueled by a mix of bargain-hunting, fiscal policy shifts, and the tantalizing prospect of a peace deal in Ukraine. The euro and bond yields are climbing, while the dollar and Treasuries slump—proof that global capital is rebalancing. Defence and infrastructure spending is setting the tone for a European revival, while Washington is left debating whether it’s about to stumble into a self-inflicted “Trumpcession.”

A recession, though, would mean two quarterly contactions in GDP in a row – which Paul Ashworth, chief North America economist at Capital Economics, doesn’t see happening.

He wrote last week:

Following the 0.5% m/m slump in real consumption in January and the massive 10% m/m surge in real goods imports, we now expect first-quarter GDP to contract by 1.0% annualised. Assuming that surge in imports reflects the front-running of tariffs, however, it should be more than reversed in the second quarter, when we expect GDP to rebound by 4.5% annualised.

The upshot is that a “Trumpcession” should be avoided and there is no need for the Fed to cut interest rates.

The value of Ukrainian government bonds is sliding this morning, after Donald Trump paused US military aid to Kyiv.

Ukraine’s GDP warrant – a security that pays out more to investors if the country’s economy grows strongly – has dropped by 0.6 cents to trade at 80 cents, its lowest level since mid-January.

A 10-year bond which matures in 2023, and whose future payments are linked to economic performance, have dropped by around 2 cents to around 59.19 cents on the dollar, a one-month low.

[Because these bonds continue to trade below their face value, it reflects uncertainty that bond-holders will be repaid in full when the debt matures.]

The oil price has hit its lowest level of the year, hit by anxiety over the tariffs imposed by the US, and the retaliatory measures from Canada and China.

Brent crude, the international benchmark, has fallen by 1% to $70.85 per barrel, the lowest since early December.

US crude is also at a 2025 low, at $67.79 per barrel.

News yesterday that the OPEC+ group has decided to proceed with a planned output increase in April is also weighing on the market.

Joseph Dahrieh, managing principal at brokerage Tickmill, says:

Crude oil futures continue to slide following OPEC+’s decision to increase output by 138,000 barrels per day in April and the uncertainty surrounding U.S. tariffs. The decision to unwind previous production cuts raises concerns about potential oversupply. With increased output, global crude prices face downward pressure, particularly if demand growth fails to match the rise in supply.

Furthermore, geopolitical factors, such as peace talks in Europe, could lead to an easing of sanctions on Russia and reducing disruption risks, potentially adding more oil to the market. This could weigh on prices over the medium to long term.

U.S. tariffs on Canadian and Mexican imports, including energy products, could further dampen economic activity and reduce fuel demand, exerting additional downward pressure on oil prices. Reduced demand from these key markets coupled with global economic uncertainty could weigh on the outlook for crude.

Britain’s stock market has opened in the red.

The FTSE 100 dropped by 57 points, or 0.65%, at the start of trading to 8813 points, a day after rising over 8,900 points for the first time ever.

Energy companies are leading the fallers, with BP down 4% and Shell losing 2.8%, tracking a drop in the oil price.

Mining companies, such as Anglo American (-2%) and Glencore (-2%) are also in the top fallers, reflecting concerns that a trade war will hit demand for commodities.

The Canadian dollar and the Mexican peso hit their lowest levels in a month after Donald Trump announced new tariffs are kicking in today.

The Canadian dollar weakened to 1.454 to the US dollar on Monday night, its weakest level since 3 February – the day Trump postponed sweeping new US tariffs on goods from Canada and Mexico.

The Mexican peso has lost 1.5% against the US dollar so far this week, hitting 20.8/$, again the lowest since 3 February.

Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.

Fears are growing of a global trade war, after China and Canada retaliated against the US following Donald Trump’s decision to impose sweeping tariffs on their exports to the US.

Hopes that Trump might have produced a last-minute reprieve were sunk yesterday, when the US president declared that the new 25% tariffs on imports from Canada and Mexico, and a new 10% levy on China, would begin today as scheduled.

This rattled Wall Street, where the S&P 500 share index tumbled by 1.7% last night – its biggest daily drop since 18 December – and the tech-focused Nasdaq slumped 2.6%.

Overnight, China and Canada unveiled retaliatory measures against the US.

China will impose fresh tariffs on a range of agricultural imports from the US next week. Its finance ministry said additional 15% tariffs would be imposed on chicken, wheat, corn and cotton, with further 10% tariffs on sorghum, soybeans, pork, beef, aquatic products, fruits, vegetables and dairy products.

Canadian prime minister Justin Trudeau said Ottawa would respond with immediate 25% tariffs on C$30bn ($20.7bn) worth of US imports. He said previously that Canada would target American beer, wine, bourbon, home appliances and Florida orange juice.

Mexico is expected to announce its response Tuesday morning.

It’s a jolt for investors who may have optimistically hoped that Trump might have had a last-minute change of heart.

Chris Weston, analyst at brokerage Pepperstone, says:

Market anxiety levels have been dialled up, and we see traders having to react aggressively and dynamically to the deluge of headlines and social posts confirming that tariffs on China, Mexico and Canada are to be implemented in full and as threatened.

The fact that we received confirmation of tariff implementation a day early and in full will surprise factions of the market, with a broad feeling that Mexico and to a lesser extent Canada could win a reprieve and see another suspension to the 25% tariff implementation date.

Stocks have fallen in some Asia-Pacific markets; in Japan, the Nikkei share index has dropped 1.2%, Australia’s S&P/ASX has lost 0.6%, while India’s main indices are a little lower, -0.2%.

China’s markets are slightly higher, though, perhaps lifted by hopes that policymakers may announce new stimulus measures as policymakers gather this week in Beijing for the annual parliamentary gathering.

European stock markets are set for a lower open, a day after the UK’s FTSE 100 index hit a record high as defence stocks surged on Monday.

The agenda

• 8am GMT: Kantar’s UK grocery inflation data

• 9.30am GMT: ONS on Mergers and Acquisitions involving UK companies – October to December 2024

• 2.25pm GMT: Chancellor Rachel Reeves speaking at Make UK conference