U.S. tariffs on auto imports spark global trade tensions, with Canada, Japan, and others weighing retaliation. Inflation fears rise as markets brace for April 2 reciprocal tariffs. Gold surges past $3,085 amid safe-haven demand, while Fed officials warn of prolonged economic uncertainty.

U.S. Tariff Shockwaves: Economic Fallout, Currency Risk, and Consumer Sentiment in Focus

On Wednesday, U.S. President Donald Trump escalated trade tensions by signing a proclamation imposing a 25% tariff on auto imports. Markets are now trying to assess how countries will respond, what the economic fallout might be, and the potential inflationary effects. This move came just days ahead of the reciprocal tariffs expected on April 2, deepening global uncertainty and concerns over the direction of trade.

Countries likely to be most affected by the auto tariffs include Canada, Mexico, Japan, South Korea, and Germany. While these nations have voiced intentions to retaliate, they are also exploring new international partnerships to cushion the economic blow.

Tariffs on Mexican and Canadian imports will be applied only to the value of non-U.S. content, in line with the USMCA agreement. Still, they pose a serious threat to the automotive sectors of both countries, making it difficult for them to remain unresponsive. Canadian Prime Minister Mark Carney said his government would oppose the auto tariffs, though he did not disclose specific details.

Canada also plans to monitor the reciprocal tariffs set to be announced on April 2 and could respond with additional duties on up to C$95 billion worth of U.S. goods. At the same time, Carney is working to reduce Canada's trade dependence on the U.S. and has recently traveled to France and the UK to strengthen international ties.

Meanwhile, Japanese Prime Minister Shigeru Ishiba acknowledged on Thursday that the tariffs would have a significant impact on the Japanese economy and promised comprehensive measures to protect domestic industries. Auto-related goods account for a sizable share of Japan's total exports, and the automotive sector employs 8.3% of the country's workforce. Ishiba said his government would consider cash flow support measures to protect both businesses and the workforce.

Additionally, citing unnamed sources, local media reported that Japan may consider easing non-tariff barriers imposed on U.S. imports in exchange for exemption. Japan has previously requested exemptions multiple times, but those appeals were ignored.

Meanwhile, senior trade officials from Japan and South Korea are expected to meet their Chinese counterparts in Seoul this weekend to discuss economic cooperation.

Efforts by countries hit by Trump's tariff campaign to build trade alliances outside the U.S. are not just a reaction to existing measures---there's widespread expectation that more tariffs are coming. Governments are scrambling for exit strategies that won't upend the global trade system.

Trump may soon introduce new sector-specific tariffs on lumber, semiconductors, pharmaceuticals, and copper. He has also threatened to impose an additional 25% tariff on imports from countries that purchase oil from Venezuela, whether directly or indirectly---signaling that his trade pressure could take on unconventional forms.

Trump's unpredictable policy stance continues to unsettle investor sentiment, and markets likely haven't fully priced in the impact of the upcoming tariffs. According to Bloomberg, global fund managers say they are currently maintaining neutral positions and reducing portfolio risk ahead of the April 2 announcement. Many indicate they are ready to reposition once there is more clarity, but persistent uncertainty could keep risk-off positioning elevated.

On the other hand, Trump's tariff offensive not only threatens to accelerate inflation and undermine growth in the U.S., but is also expected to strain the economies of affected countries. Analysts at Barclays estimate that in an extreme scenario where all of Trump's proposed tariffs are implemented, the Mexican peso could depreciate by as much as 38% against the U.S. dollar, the Canadian dollar by 19%, and the Chinese yuan by approximately 21%. Additionally, the euro could fall by around 9%.

However, there are diverging views on whether Trump's tariffs will ultimately hurt the U.S. economy more than its trading partners. Some analysts believe the risk of a U.S. recession is growing and that the Federal Reserve may be forced to ease policy further. In such a scenario, the U.S. dollar could weaken against major currencies.

Others argue that while the U.S. economy may slow, it remains resilient enough to withstand the shock. They expect elevated inflation risks to keep the Fed on hold for longer. If the Fed adopts a more hawkish tone, it could undermine expectations of rate cuts and strengthen the dollar.

Meanwhile, a growing number of Fed officials are expressing concern that the inflationary effects of tariffs may not be as transitory as Chair Jerome Powell suggested last week. Boston Fed President Susan Collins said Thursday that a near-term rise in inflation due to tariffs now appears "inevitable," and that holding interest rates steady for longer is likely appropriate.

Speaking the same day, Richmond Fed President Tom Barkin echoed this view, saying he would not assume the inflation impact of tariffs will be temporary. Barkin likened the current uncertainty to a fog not of "reduced visibility", but of "zero visibility," making forecasting nearly impossible.

Policymakers are also emphasizing weakening sentiment among consumers and businesses, and the increasing importance of inflation expectations. They warn that deteriorating consumer confidence could suppress demand.

As Duhani Capital Research team, we expect elevated uncertainty surrounding tariffs to persist, and we assess worsening sentiment could weigh on consumer spending. In such an environment, it is difficult to completely rule out the risk of recession. However, hard data remains relatively solid, and more significant deterioration would likely be needed to push the Fed toward further easing.

Against this backdrop, markets are closely watching inflation data due out in a few hours. The Fed's preferred inflation gauge -core PCE price index- likely accelerated slightly in February to 2.7%. Meanwhile, next week's long-anticipated reciprocal tariffs are set to be announced, and Friday's jobs report will offer a real-time snapshot of labor market conditions.

Safe-Haven Rush Lifts Gold Above $3,085 as Uncertainty Builds

Amid heightened uncertainty and ahead of the critical April 2 tariff announcement, gold continues to benefit from safe-haven demand driven by risk aversion. On Friday, the precious metal marked its fourth consecutive weekly gain, surging past $3,085 per ounce to reach a new all-time high.

Gold has risen more than 17% since the beginning of the year. The rally has been fueled by mounting economic and geopolitical uncertainty, robust safe-haven flows, and sustained central bank purchases.

In addition, growing bets in recent weeks that the U.S. economy may slip into recession---and that the Federal Reserve may accelerate rate cuts---have weighed on the U.S. dollar, making gold more affordable. At the same time, gold is benefiting from the prospect of lower interest rates.

Against this backdrop, economists continue to revise their gold price forecasts higher. This week, Goldman Sachs raised its year-end forecast to $3,300, citing strong safe-haven demand and ongoing central bank buying as key drivers.

Looking ahead, the uncertainty stemming from Trump's policies is likely to persist, encouraging investors to remain parked in safe-haven assets like gold. Moreover, there are no clear signs that global geopolitical tensions will ease anytime soon. Unless there is a major shift in global sentiment, these conditions suggest that the outlook for gold will likely remain bullish.