Trading blows: The exchange-rate response to tariffs and retaliations

This paper provides econometric evidence on how exchange rates respond to tariffs. We construct a new tariff-shock database, which captures tariff-related announcements, threats and implementations by the US, China, the euro area and Canada between 2018 and 2020, and in 2025. Our shock measure accounts for both the size of tariff rates and their economic relevance. We show that exchange rates react to US tariff shocks in systematically different ways depending on retaliation: the US dollar (USD) appreciates if the tariff is imposed unilaterally, but depreciates if other countries retaliate. This empirical pattern resonates with the predictions of recent open-macro models with dominant currency pricing. In light of our evidence and drawing on theory, we conclude that the USD depreciation following the US tariff announcement on 2 April 2025 was not surprising. The spike in long-maturity US Treasury yields was, however, more unprecedented.