By Ankur Banerjee

SINGAPORE (Reuters) -The U.S. dollar rose on Tuesday after President-elect Donald Trump said he would impose tariffs on products coming into the United States from Mexico, Canada and China, as investors braced for polices that could set the stage for a trade war.

In an initial knee-jerk reaction to Trump’s comments, the dollar jumped more than 2% against the Mexican peso and hit a four-and-a-half-year high against its Canadian counterpart.

The U.S. currency also rose to its highest level since July 30 against China’s yuan. Other currencies also fell against the dollar but pared loss by mid-afternoon in Asia.

The dollar has been on the back foot over the past couple of days as U.S. Treasury markets cheered Trump’s pick of hedge fund manager Scott Bessent for U.S. Treasury Secretary.

While traders see Bessent as an old Wall Street hand and fiscal conservative, he has favoured a strong dollar and supported tariffs. Analysts said market reaction to the choice will likely be short lived.

“The market is going to be twitchy” when it comes to Trump comments, said senior market strategist Jason Wong at BNZ. “You can jump to conclusions but I wouldn’t be jumping to anything at the moment so the market just needs to get a grip.”

Trump said that on his first day in office he would impose a 25% tariff on all products from Mexico and Canada.

On China, the president-elect said Beijing was not taking strong enough action to curb the export of ingredients used in illicit drugs.

“Until such time as they stop, we will be charging China an additional 10% Tariff, above any additional Tariffs, on all of their many products coming into the United States of America,” Trump said.

China has previously denied the allegations. Neither the United States nor China would win a trade war, the Chinese Embassy in Washington said after Trump’s posts.

The Australian dollar sank to a more than three-month low of $0.64335 in early Asian hours and was last down 0.21% at $0.6478. The Aussie is often sold as a liquid proxy for the yuan given China is Australia’s biggest trading partner. [AUD/]

New Zealand dollar touched a one-year low of $0.5797 but erased most of that loss to trade flat at $0.58415.

Ben Bennett, Asia-Pacific Investment Strategist at Legal And General Investment Management, said investors have so far focused on market-positive policies under President-elect Trump like tax cuts and deregulation since the election, but that it is arguably quicker for him to implement his more challenging policies such as higher tariffs. “This announcement serves as a wake up call.”

“Tariffs should be good for the U.S. dollar and bad for currencies that are being tariffed as trade balances shift, but I’m not sure Trump’s government will be happy to let that trade accelerate.”

Some analysts said tariff threats could be seen as a negotiating tactic.

“The silver lining to this is that instead of an ideologically driven tariff scenario where there is little to be done to avoid a major second trade war, as long as there is room for negotiation there is a possibility for a less damaging outcome,” said Lynn Song, chief economist for Greater China at ING.

The dollar index, which measures the U.S. currency against six rivals, was last at 107.04. The euro was 0.18% lower at $1.04785, while sterling last fetched $1.25525, down 0.14% on the day.

The euro zone’s single currency had taken a hit on Friday as European manufacturing surveys showed broad weakness, while U.S. surveys surprised on the high side.

The yen was an outlier, trading 0.4% higher at 153.55 a dollar.

Turning to cryptocurrencies, bitcoin was trading at $94,375, well below the record high of $99,830 it touched last week.

Bitcoin met profit-taking ahead of the symbolic $100,000 barrier, having climbed more than 40% since the U.S. election on expectations Trump will loosen the regulatory environment for cryptocurrencies.

(Reporting by Ankur Banerjee in Singapore, additional reporting by Summer Zhen in Hong Kong; Editing by Christopher Cushing)

---