06:36 AM EST, 03/03/2025 (MT Newswires) -- The US dollar (USD) has given back some of its strong gains recorded at the end of last week, resulting in EUR/USD rising back above the 1.0400 level overnight Sunday, said MUFG.

The rebound for the US dollar at the end of last week reflected more concern amongst market participants that President Donald Trump will follow through with some of his threats to implement more disruptive tariffs in the coming months, wrote the bank in a note to clients. An important stress test will be Tuesday's self-imposed deadline to implement 25% tariff hikes on Canada and Mexico and an additional 10% tariff hike on China.

It would come on top of the 10% tariff hike that has already been put in place from Feb. 4 on all goods imported from China.

Market participants are hopeful that the tariff hikes on Canada and Mexico will be delayed again, stated MUFG. While the Canadian dollar (CAD or loonie) and Mexican peso (MNX) have weakened over the past week, the scale of sell-offs has been relatively "modest" compared with the size of the tariffs President Trump is threatening to implement.

U.S. Treasury Secretary Scott Bessent has previously stated that the US dollar should strengthen to offset around 40% of the tariff hike, all things being held equal. It fits with the bank's view that the Canadian dollar and Mexican peso would weaken by around 5%-10% if President Trump puts in place tariff hikes of 25% on Canada and Mexico.

Market expectations for another tariff delay and/or watering down of the tariff threats have been encouraged by comments from Commerce Secretary Howard Lutnick over the weekend who told Fox News that "they have done a lot, so he's sort of thinking about right now how exactly he wants to play with Mexico and Canada and that is a fluid situation."

However, Lutnick did go on to warn that "there are going to be tariffs on Tuesday on Mexico and Canada, exactly what they are, we're going to leave that for the president and his team to negotiate."

Canadian Prime Minister Justin Trudeau emphasized over the weekend that " we will continue to work to ensure to do everything we can to make sure that there are no tariffs on Tuesday, but if ever there were tariffs on Tuesday, as we have all seen -- we are ready to do last time -- we will have a strong unequivocal and proportional response as Canadians expect."

Mexico is reportedly even considering applying tariffs to imports from China as part of a deal to avoid US tariffs.

In contrast, MUFG is less optimistic that China can avoid another 10% tariff hike, posing downside risks for the renminbi and other Asian currencies. The bank would expect Chinese policymakers to be more willing to allow the renminbi to weaken further against the US dollar to provide an offset to the negative impact on external demand from another U.S. tariff hike, lifting USD/CNY up towards the bank's forecast of 7.5000.