Eve here. The day of liberation is strangely farther than it actually is, and with it, it also fades some degree of response to its immediate effects. Nevertheless, market-oriented readers may remember the shock of dollar serov. The following economists explain that submitting many models via the effects of retaliation is not considered.
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Giancarlo Corsetti, Chairman and Co-Professor Pierre Werner, Faculty of Economics, Robert Schumann Institute for Advanced Studies, Simon Lloyd, Research and Policy Advisor Bank in England, and Daniel Ostrey of Research Economist Bank Bank in the UK. Originally published on Voxeu
For many, the depreciation of the US dollar after the release of the “liberation date” tariffs on April 2, 2025 was against traditional wisdom. However, the open macro model predicts that the impact of tariffs on exchange rates will depend on the response of trade partners. Given the retaliatory thread, this column examines the impact of tariffs on the US dollar by reviewing the impact of US tariffs announced in 2025 or during or collected in 2020. However, the long-standing surge in US Treasury yields since April 2 is more unprecedented.
The sudden depreciation of the US dollar (USD) following the tariff year on April 2, 2025 “liberation date” appeared to mark a break from past patterns. The US dollar was weakened by signing against the euro with both effective terms beyond the basket of currencies (see Figure 1). Many argued that this response was contrary to traditional wisdom (Hartley and Rebucci 2025, Cardani etal. 2025). Others interpreted dollar depreciation, coupled with a long-term surge in US Treasury bond yields as a “reserve currency shock” (Jiang et al. 2025), as a change in research perceptions about safety premiums traditionally associated with the US dollar.
Figure 1 In the days of the release date, the US dollar depreciated significantly against the euro (and other currencies).
Source: Ostry et al. (2025)
However, open macro theory predicts that the impact of tariffs on exchange rates will depend on how trading partners respond to such measures. In other words, the US dollar’s response to tariffs as to whether or not tariffs are met in retaliation is to evaluate them when tariffs are unilaterally promised but otherwise depreciated. As Bergin and Corsetti (2023, 2025) shows, this result may emerge when exports are billed in dollars due to the integrated effects of trade policy and optimal financial stabilization (both in the US and Augusta). Through that lens, the depreciation of US dollars after relaval is not so surprising.
A recent paper (Ostry etal. 2025) states whether this theoretical prediction is based on data.
2018-2020 reviews
To do this, use to check the customs exchanges from the 2018-2020 period and ask: Will the required tariffs lead to stronger currency? Compared to existing literature, our innovation lies in distinguishing tariff shocks that are not characterized by foreign retaliation.
The example from March 1, 2018 most motivates our analysis. On this day, the US announced tariffs on steel and aluminum imports from the EU. A retaliation response was immediately anticipated. For example, the Financial Times headline on March 2 reads, “The EU believes it will import customs duties according to us.” And on March 7, the EU officially announced retaliatory measures. As with the time after the release date, the US dollar quickly faded after the US announcement, and the slug-out march continued to decline (see Figure 2).
Figure 2 After the tariffs announced on March 1, 2018, the US dollar also depreciated against the euro.
Source: Ostry et al. (2025)
Econometric analysis using daily data confirms that this pattern is systematic. An important wake-way is that US tariff pensions are not associated with stronger US dollars. In fact, when markets sell foreign retaliation, blame is common.
New data set
To conduct our research, we will create a new database of US tariff announcements, threats, and implementations from 2018-2020 and build it from 2025 for comparison. This includes corresponding response responses from the EU, China and Canada. We rely on a detailed event timeline compiled by the Peterson Institute for International Economics.
The results dataset includes 35 US and 15 foreign tariff events from 2018 to 2020, and 13 US and 10 foreign events for 2025. The economic scale of each action is quantified with “effective tariff fees.” This captures the economic reprobability of each event.
Each US TAVF is treated as a “shock.” This is contubating information that is largely independent of the market in terms of tariff rate, sector and coverage. The unfounded, programmed nature of these events is less clear, as the rest of the world’s events are reprehenced retribution. Therefore, we use foreign liability to distinguish between retaliated and unretaliated US tariff shocks. At our baseline, US tariff shocks are labelled “retaliation” if other countries threaten or impose tariffs within seven days.
The tariff events for the dataset are shown in Figure 3 and plots effective US tariff shocks over 2018-2020 (top panel) and 2025 (bottom panel). The orange circles only represent those targeting China, while the black squares represent tariffs targeting a wider range of countries, as well as China. These primarily reflect duties on certain products, such as steel and aluminum, cars, solar panels and washing machines, from 2018 to 2020. A filled marker indicates a retaliated action. For example, the first filled black square on the left marks the steel/aluminum announcer for March 1, 2018. The calculated impact is about 0.3 percentage points, accounting for 25% and 10% tariffs on steel and aluminum, respectively, accounting for the share of total imports.
Figure 3 Effective tariff rate shocks for 2018-2020 and 2025
a) 2018-2020
b) 2025
Source: Ostry et al. (2025).
Note: A shock built by combining tariff news timelines with narrative evidence on the scale and economic reuse of each event.
In addition to the fact that US tariff measures were single digits larger in 2025, two important differences between the 2018-2020 US tariff shock and 2025 (announcement on April 2, 2025 was a 14% point shock). First, almost all 2025 US tariff measures will be retaliated and will be distinguished by women more than 50% in 2018-2020. Second, while most 2025 US actions apply to a wide range of countries and are characterized by global retaliation, most 2018-2020 actions cover China only.
Customs and Exchange Rates
Using datasets, local forecasts are used to estimate how US dollars and other variables respond to US tariff shocks. Figure 4 shows the important results for the 2018-2020 period.
Figure 4: The impact of the US dollar conditional tariffs on retaliation.
a) All US tariffs
b) US “global” tariffs
Source: Ostry et al. (2025)
Panel A shows the response to the bilateral CNH/USD exchange rate (increasing valuation of the US dollar) to the shock of the US Tarif shock with no retaliation (left figure) and retaliation (right figure). In the absence of retaliation, US tariff measures will create significant use of CNH in line with traditional wisdom. However, in witnesses of retaliation, the initial valuation of the US dollar has been fully revived.
A surprising and retaliatory response to our “global” heads – leading to depreciation of the US dollar, not just China. This is shown in panel B. This places the responsibility for the EUR/USD exchange rate on a broader set of US trading partners, namely a subset of US tariff shocks that apply to Offen to the EU, Canada, Mexico and China. The theater’s global tariff shock is similar to the 2025 “liberation day” rate, which has been commissioned to all US trading partners.
As before, US global tariffs, subject to foreign retaliation, in this case, value the US dollar against the euro highly. However, when we encounter retaliation, the US dollar depreciates strongly, dropping by up to 8% against US tariffs on euro percentage points per country.
What’s the difference in 2025?
As discussed above, theory and evidence suggest that when a country launches tariff exchanges and encourages widespread expectations of retaliation, its currency may not be strengthened. In this sense, the US dollar depreciation in April 2025 is not surprising.
However, there are significant differences between the previous sample and 2025, particularly in the joint movement between depreciation scale and other asset prices. To investigate this, we expand our empirical model to study the response of US bond yields at various maturities.
In both samples (2018-2020 and 2025), US dollar depreciation involves a decrease in the short-term Treasury yields in line with theory. However, as explained in detail in this paper, we observe a sharp rise in long matsuri yields only in 2025.
Conclusion
The US dollar depreciation on the “liberation date” consists of previous discoveries. The dollar weakens, especially when widespread tariff actions encounter a threat of retaliation. The decline in short-term yields is in line with past episodes. But what’s new is the enduring increase in the long-term Treasury yield. This is the prerequisite movement of the dataset.
See original bibliographic submission
