Global markets tumbled yesterday over fears of a trade war after Donald Trump imposed huge tariffs on Mexico, Canada and China.

But the pound rallied against the euro – driven by hopes that while the European Union may be next in Mr Trump’s sights, Brexit Britain could be spared.

It followed the US president saying the EU’s behaviour was an ‘atrocity’ and that while the UK was ‘out of line… that one can be worked out’.

After Mr Trump’s comments, referencing trade deficits, the FTSE 100 group of top companies at one point slid by as much as 1.8 per cent, or 154 points, wiping £38billion off its value. Stocks in the US, Europe and Asia were also sharply down.

The turbulence erupted after Mr Trump announced tariffs of 25 per cent on imports from America’s neighbours Mexico and Canada over the weekend, as well as a 10 per cent charge on Chinese goods.

The markets partially recovered after reports the President had agreed to pause tariffs on Mexico.

Economists said the tariffs would hit not just the countries directly involved, but threatened a wider trade war, which would slow the global economy as well as imposing higher prices on American consumers – and even Mr Trump admitted the move could cause pain.

George Saravelos of Deutsche Bank said that if the tariffs went ahead it would represent the largest shock in global trade policy since the 1970s, even bigger than the trade war against China launched by Mr Trump during his first term.

Global markets tumbled over fears of a trade war after Donald Trump (pictured) imposed huge tariffs on Mexico, Canada and China 

The turbulence erupted after Mr Trump announced tariffs of 25 per cent on imports from America’s neighbours Mexico and Canada over the weekend

Speaking about Trump’s tariffs, Keir Starmer said: ‘It’s early days and I think what’s really important is open and strong trading relations’ 

‘These tariffs are roughly five times as large as the cumulative sum of trade actions taken under the first Trump administration,’ Mr Saravelos said.

Markets partially recovered after an apparent agreement to pause tariffs against Mexico for a month after positive talks with the country’s president Claudia Sheinbaum, which saw her agree to send 10,000 troops to help police the border with the US. 

Trump has hammered the two countries amid anger they are letting drugs and illegal migrants into the US.

The FTSE 100 closed 1 per cent, or 90 points down at 8584.

But it was still a bleak start to February after the blue-chip index enjoyed its strongest month for more than two years in January, ending on a record high last Friday.

Meanwhile, Germany’s Dax fell 1.4 per cent while France’s Cac 40 lost 1.2 per cent and Japan’s Nikkei fell 2.7 per cent.

But the reaction on Wall Street showed that US stocks – and millions of American savers – also faced a hit.

The S&P 500 opened 1.2 per cent lower and the tech-heavy Nasdaq index lost an initial 2.1 per cent. Both later clawed back some of the losses.

There were sharp falls too for cryptocurrencies – an industry whose major players include some of Mr Trump’s biggest backers.

Piles of lumber are seen for sale at a home improvement store in Falls Church following Mr Trumps’s announcement of tariffs

Economists said the tariffs would hit not just the countries directly involved, but threatened a wider trade war (pictured: View of avocados and tomatoes for sale inside a market in Mexico City) 

Markets partially recovered after an apparent agreement to pause tariffs against Mexico for a month after positive talks with the country’s president Claudia Sheinbaum (pictured) 

Despite the more positive noises about the UK, the FTSE 100 plunged over 100 points in early trading on alarm about the wider impact

The Pound is down against the US dollar this morning, although it has been gaining against the euro 

Bitcoin fell to about $92,000 on Sunday night before rebounding to around $99,000 yesterday.

Traditional currency markets were also rocked by the developments, which sent the dollar soaring.

The euro slid close to $1.02, prompting predictions that it could soon hit parity with the US currency.

However, the pound – after an initial hit – was later flat versus the US dollar.

Fears that Mr Trump would hit Europe next rose after he lamented the trade deficit between the US and the EU. It means Europe sells more goods to the US than the US sells to Europe.

Mr Trump said: ‘They don’t take our cars, they don’t take our farm products. They take almost nothing and we take everything from them.’

Car makers in Europe would be among the worst hit by US tariffs on Europe – and shares in Germany’s Volkswagen, BMW and Porsche all fell sharply.

US car firms – with plants in Canada and Mexico and supply chains criss-crossing all three countries – would also be affected, sending shares in Ford and General Motors lower.

Car makers in Europe would be among the worst hit by US tariffs on Europe – and shares in Germany’s Volkswagen (pictured), BMW and Porsche all fell sharply

Arriving at an informal summit in Brussels yesterday, French president Emmanuel Macron (pictured) said if the EU were attacked it would have to ‘make itself respected and thus react’

German chancellor Olaf Scholz said the bloc could respond if necessary with its own tariffs against the US, but he stressed it was better for the two to find agreement on trade

In the UK, drinks maker Diageo was among the fallers yesterday – as it is exposed to the tariffs through its ownership of tequila brands in Mexico.

If Britain does end up being hit with tariffs, its pharmaceutical and car making sectors would be the most vulnerable, according to Paul Dales, chief UK economist at Capital Economics.

EU leaders yesterday warned Mr Trump they would fight back if the US hits Europe.

Arriving at an informal summit in Brussels yesterday, French president Emmanuel Macron said if the EU were attacked it would have to ‘make itself respected and thus react’.

And German chancellor Olaf Scholz said the bloc could respond if necessary with its own tariffs against the US, but he stressed it was better for the two to find agreement on trade.

The EU’s foreign policy chief Kaja Kallas, meanwhile, said there were no winners in a trade war, and if one broke out between Europe and the United States, ‘then the one laughing on the side is China’.

Last night British PM Sir Keir Starmer said: ‘It’s early days and I think what’s really important is open and strong trading relations.

‘That’s been the basis of my discussions with President Trump and I know that intense US-EU discussions are planned.’