LONDON - The dollar rallied on Tuesday while European shares fell after U.S. President-elect Donald Trump pledged tariffs on all imports from Canada and Mexico, and additional tariffs on China.

European equities dropped, led by steep declines in automaker stocks, one of the potential losers from any Trump-imposed tariffs on the European Union.

The Mexican peso and Canadian dollar came under fire, while the euro also wilted.

"The dollar's had a knee-jerk move higher, the Canadian dollar's softer, the peso is softer and the equity reaction - particularly in Europe - makes sense," Pepperstone senior market strategist Michael Brown said.

"Because the market's thinking, 'well, what's the one country or the one bloc that's likely to be next? It's probably going to be the EU. So naturally you're going to be short European equities this morning," he said.

The STOXX 600 fell 0.7% in early trade, with shares like Volkswagen and Stellantis - the maker of Chrysler, Dodge and Fiat - down 2.6-5%.

U.S. S&P 500 futures eased 0.1% following a 0.3% gain in the cash index overnight.

The weekend nomination by Trump of Scott Bessent as Treasury Secretary triggered a wave of positive sentiment on Monday that boosted stocks and bonds, as the fund manager is viewed as a voice for Wall Street in Washington.

But Tuesday's tariff announcement undid much of that optimism.

"It's almost as if Trump wants to remind markets who is in control, after nominating Scott Bessent as Treasury Sec - a man markets expected to cool Trump's potency," said Matt Simpson, senior market analyst at City Index.

"With the Canadian dollar rising against the Mexican peso, markets are assuming this will hit Mexico the hardest."

DOLLAR BOUNCES

The dollar jumped as much as 2.3% to 20.75 Mexican pesos and was last up 1.7% on the day and rose 1% against the Canadian dollar to C$1.4139.

It strengthened 0.3% to 7.2674 yuan in offshore trading , after earlier reaching the highest since late July at 7.2730 yuan.

"It was just last month that Trump said that 'the most beautiful word in the dictionary is tariff', so there really should not have been a surprise in Trump's intention, just in the timing of the comments," said Sean Callow, a senior FX analyst at ITC Markets.

"The fall in trade-sensitive currencies makes sense, and should persist near term."

Trump said in a post on Truth Social that on his first day in office he would impose a 25% tariff on all products from Mexico and Canada, and an additional 10% tariff on goods from China, citing concerns over illegal immigration and the trade of illicit drugs.

Trump has previously threatened to slap tariffs on Chinese imports in excess of 60%.

"Our view remains that tariffs will eventually not end up as bad as feared, but we will see increased uncertainty over the coming months. Waking up to check the tweets for any policy announcements could become the norm," Jefferies strategist Mohit Kumar said.

The euro fell 0.1% to $1.04838, while sterling eased 0.2% to $1.2548.

At the same time, the dollar weakened 0.3% to 153.66 yen , after initially strengthening following Trump's tariff remarks.

The dollar-yen pair tends to track long-term U.S. Treasury yields, which ticked up about 3.7 basis points to 4.3% in Europe, after Monday's 15 basis-point fall.

Bitcoin fell 1% to $92,781, easing further from last week's record high at $99,830. The token has benefited from speculation of an easier regulatory environment for cryptocurrencies under Trump.

Gold succumbed to the dollar's strength, dipping to a one-week low of $2,604.99.

Oil prices recovered slightly from the previous session's 2.8% drop as investors mulled the implications of a potential ceasefire between Israel and Hezbollah.

Brent crude futures rose 0.6% to $73.41 a barrel, while U.S. West Texas Intermediate crude futures rose 0.45% to $69.25 a barrel.

(Additional reporting by Kevin Buckland in Tokyo and Ankur Banerjee in Singapore; Additional reporting by Stella Qiu; Editing by Jacqueline Wong and Bernadette Baum)