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Global Trade, Tariff Uncertainty, and the US Dollar

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  • Şebnem Kalemli-Özcan
  • Can Soylu
  • Muhammed A. Yıldırım

Abstract

We analyze how tariff uncertainty affects exchange rates, motivated by the US dollar’s depreciation after the 2025 tariff announcements. Standard macrotrade models predict that unilateral tariffs appreciate the implementing country’s currency, but we show this result can be overturned by policy uncertainty. We build a two-country general equilibrium model with risk-averse agents and segmented financial markets, where tariff volatility enters uncovered interest parity through a risk-premium wedge. Higher tariff uncertainty increases precautionary savings and risk premia, leading to immediate currency depreciation even as tariffs rise. Quantitatively, the model replicates the size and timing of the observed dollar depreciation episode dynamics.

Suggested Citation

  • Şebnem Kalemli-Özcan & Can Soylu & Muhammed A. Yıldırım, 2026. "Global Trade, Tariff Uncertainty, and the US Dollar," AEA Papers and Proceedings, American Economic Association, vol. 116, pages 47-52, May.
    • Handle: RePEc:aea:apandp:v:116:y:2026:p:47-52
    DOI: 10.1257/pandp.20261039
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    References listed on IDEAS

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    1. Rohan Kekre & Moritz Lenel, 2024. "Exchange Rates, Natural Rates, and the Price of Risk," NBER Working Papers 32976, National Bureau of Economic Research, Inc.
    2. Ozge Akinci & Ṣebnem Kalemli-Özcan & Albert Queraltó, 2022. "Uncertainty Shocks, Capital Flows, and International Risk Spillovers," Staff Reports 1016, Federal Reserve Bank of New York.
    3. Cole, Harold L. & Obstfeld, Maurice, 1991. "Commodity trade and international risk sharing : How much do financial markets matter?," Journal of Monetary Economics, Elsevier, vol. 28(1), pages 3-24, August.
    4. Ozge Akinci & Ṣebnem Kalemli-Özcan & Albert Queralto, 2022. "Pricing Risk Globally: Intermediary Constraints, the Dollar, and the Global Financial Cycle," NBER Working Papers 30026, National Bureau of Economic Research, Inc.
    5. Scott R. Baker & Nicholas Bloom & Steven J. Davis, 2016. "Measuring Economic Policy Uncertainty," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 131(4), pages 1593-1636.
    6. Oleg Itskhoki & Dmitry Mukhin, 2025. "The Optimal Macro Tariff," NBER Working Papers 33839, National Bureau of Economic Research, Inc.
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    More about this item

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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