NEW YORK/MEXICO CITY/LONDON: The Mexican peso tumbled over 2.0 per cent to its lowest in nearly three years against the dollar on Monday after the United States imposed25 per cent tariffs on its southern neighbour 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 per cent 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 per cent 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 per cent 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 orders means the 25 per cent tariffs will be applied on Mexican and most Canadian imports from Tuesday without a last-minute deal. China is set to get further 10 per cent 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 per cent at 21.1275 to the dollar and options markets were pointing to more volatility in the coming days.