By Shinichi Saoshiro
TOKYO (Reuters) - The Mexican peso sank to three-month lows against the dollar on Friday after Washington unexpectedly said it will slap tariffs on all goods coming from its southern neighbor.
The safe-haven yen advanced as the Trump administration's move to escalate its trade war with other countries shook already fragile investor sentiment in global financial markets.
"The news on Mexican tariffs came just as the United States is imposing tariffs on China, and the timing is stirring up the markets," said Daisuke Karakama, chief market economist at Mizuho Bank.
"Headlines related to trade issues come in short, unpredictable bursts. Currency market reaction is therefore quite intense, but also tends to be short-lived."
The Mexican peso was down 1.8% at 19.4812 per dollar after President Donald Trump said on Thursday the United States will impose a 5% tariff on all goods coming from Mexico from June 10 until illegal immigration is stopped.
At one point, the peso weakened to 19.5950 per dollar, its lowest since March 8.
"Imposing these tariffs is in principle, not allowed under the free trade agreement currently in place between Mexico and the United States or under WTO general frameworks," wrote Tania Escobedo, strategist at RBC Capital Markets.
"It is likely, however, that Trump will claim the measure is a matter of national security, referring to the International Emergency Economic Powers Act (IEEPA)."
The yen was up 0.35% at 109.240 per dollar and also made gains against the euro and Australian dollar.
The dollar index against a basket of six major currencies was flat at 98.106 after inching down the previous day, when it snapped two straight sessions of gains amid a continuing decline in U.S. yields.
The index was still headed for a 0.5% gain this week, supported by weakness in peers such as the euro and sterling, and the U.S. currency's own status as a safe-haven in times of market and economic troubles.
"The dollar's recent gains are part of the flight-to-quality into the United States, notably the strong investor demand for Treasuries which has driven their yields lower," said Takuya Kanda, general manager at Gaitame.Com Research Institute.
The 10-year U.S. Treasury note yield has declined steadily this week and touched 2.171% on Friday, its lowest since September 2017.
The euro was steady at $1.1133. The single currency was down 0.62% this week, weighed by factors including concerns over Italy's rising debt and the prospect of Trump opening up a European front in his trade war.
The pound was effectively flat at $1.2612. Sterling has lost nearly 0.8% this week, as the imminent departure of Theresa May as prime minister deepened fears about a chaotic exit for Britain from the European Union.
The Swiss franc, which serves as refuge in times of market turmoil, rose 0.2% to 1.0058 francs per dollar.