European stock markets have slumped after Donald Trump’s second reversal on tariffs caused deep uncertainty among investors, while the euro was on track for its biggest weekly rise since the financial crisis.

Germany’s Dax index dropped by 1.6%, as weak factory data added to the signs of difficult economic conditions. France’s Cac 40 fell by 1.2%, while London’s FTSE 100 dropped by 0.5% on Friday morning, after the US benchmark S&P 500 index fell 1.8% on Thursday night to its lowest level since early November.

The FTSE 100 was on track for its worst week of the year, while the Stoxx 600 index, which tracks big companies across the UK and EU, has dropped by about 1% this week.

Investors around the world have been trying to work out the Trump administration’s economic policies, after a chaotic cycle of tariff imposition followed by temporary reverses. Trump paused tariffs on Canada and Mexico on Thursday for the second time, meaning they will not be imposed until April.

The prospect of a trade war with the US’s two closest trading partners, and with China, the country’s third biggest, has led to warnings of a big economic hit to the global economy, as well as inflationary pressure in the US.

Trump has blamed “globalists” for the market sell-offs that have greeted his trade war against the US’s closest economic partners.

Asked on Thursday if his tariffs were scaring investors, Trump said: “Well, a lot of them are globalist countries and companies that won’t be doing as well. Because we’re taking back things that have been taken from us many years ago.”

Questions over Trump’s commitment to aiding the US’s traditional military allies have also prompted European countries – most notably Germany – to say they will borrow more to raise defence spending.

That has strengthened the euro, as investors anticipate higher interest rates in response to looser fiscal policy, as well as weaker US economic growth if Trump pursues his trade war. The euro on Thursday rose 0.5% to hit a four-month high of $1.086 against the US dollar, putting the single currency on course for its best week in 16 years during the turmoil of the global financial crisis.

The defence spending promises have also meant that the Dax is up by 2% this week, despite Friday’s share price decline.

Strategists led by Sebastian Raedler at Bank of America, a US investment bank, said investors were feeling “overwhelmed by the rapid succession of high-profile macro news”.

However, they said that “on balance, the macro news flow points to weaker global growth ahead”. US tariffs would slow the Chinese economy, while Germany’s spending increases were not likely to spur growth in the short term.

The prospect of lower growth has hit tech stocks. On Thursday, the Nasdaq index fell into a correction, more than 10% below its record high.

Oil prices were on course for the biggest weekly drop since October amid fears of slower growth, which could weigh on demand. However, prices rallied on Friday by 1.6%.

Bitcoin prices dropped 2.7% on Friday, although the biggest cryptocurrency has gained 11% in the last seven days after Trump said the US would create a strategic crypto reserve.