Trading Blows: The Exchange-Rate Response to Tariffs and Retaliations

TThis 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 U.S., 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. Over the 2018-2020 period, we show that exchange rates reacted to U.S. tariff shocks in systematically different ways depending on retaliation: the U.S. dollar (USD) appreciated if the tariff was imposed unilaterally, but depreciated if other countries threatened to retaliate. In 2025, when nearly all U.S. tariff actions were met with retaliatory threats, the USD again depreciated. In contrast to 2018-2020, however, long-maturity U.S. Treasury yields rose in 2025, instead of fell—consistent with an interpretation of ‘Liberation Day’ as a reserve-currency shock. This may reflect that U.S. tariff actions in 2025 were significantly larger, more frequent and targeted a broader set of countries.