Shares in Europe and Asia have fallen after US President Donald Trump announced tariffs on Canada, Mexico and China, and said tariffs on the EU would “definitely happen”.

The German and French stock markets were down about 2%, with shares in carmakers among the worst hit, while London’s FTSE 100 dropped more 1%.

The US dollar also strengthened on the currency markets, rising to a record high against China’s yuan, while the Canadian dollar plunged to its lowest level since 2003.

Investors are bracing for a turbulent period that could hit the earnings of major companies and dent global growth.

Canada and Mexico are facing tariffs of 25% on their exports to the US. Chinese-made goods will face a 10% levy, in addition to existing tariffs.

Canada and Mexico have said they will hit back with retaliatory tariffs while China promised “corresponding countermeasures” and vowed to challenge Trump’s move at the World Trade Organization.

Trump has said the tariffs are necessary to halt the flow of illegal drugs and immigration into the US.

And on Sunday night, he said he would “definitely” impose tariffs on the EU, although he said while the UK was “out of line”, a deal could be worked out.

“Investors are rattled at the prospects of a full-blown trade war breaking out,” said Susannah Streeter, head of money and markets at Hargreaves Lansdown.

Shares in carmakers saw the biggest falls as it is seen as the sector most at risk from disruption from the tariffs.

In Japan, Toyota shares fell 5% and Honda sank 7.2%, while in Europe shares in Stellantis – whose brands include Chrysler, Citroen, Fiat, Jeep and Peugeot – were down 7% and VW dropped 6%.

Shares in drinks maker Diageo – which exports tequila from Mexico to the US – fell 3%.

Russ Mould, investment director at AJ Bell, said there was a “sea of red flashing on the markets”.

Tariffs could lead to “higher inflation and put a stop to further interest rate cuts for the time being – exactly the opposite of what equity investors want to happen”, he added.

“Higher prices could hurt demand, and there might be a trickle-down effect that knocks business and consumer confidence and feeds into weaker economic activity.”

The prospect of interest rates staying higher for longer helped to strengthen the dollar.

As well as the dollar rising against China’s yuan and the Canadian dollar, the euro fell to more than a two-year low against the US currency.

Oil prices also rose following news of the tariffs, as traders tried to analyse how tariffs on Canada and Mexico – the two biggest sources of oil imports to the US – would affect the market.

The benchmark Brent crude oil price was up about 1% at $76.50 a barrel.

The tariffs announced by the Trump administration over the weekend target the United States’ three largest trading partners.

Chief investment strategist at investment bank Saxo, Charu Chanana, warned that while tariffs could be beneficial for the US economy in the short term, in the long run they pose significant risks.

“Repeated use of tariffs would incentivise other countries to reduce reliance on the US, weakening the dollar’s global role,” she added.

Trump has said he will speak to Canada and Mexico’s leaders on Monday about the tariffs, which are due to come into effect at midnight on Tuesday.