Tariff Uncertainty and the U.S. Dollar

Sebnem Kalemli-Ozcan, Can Soylu and Muhammed A. Yildirim

No 34728, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Standard models predict that a unilateral tariff appreciates the implementing country’s currency; in 2025, U.S. tariffs rose and the dollar fell. We show that tariff uncertainty can reverse the textbook prediction. In a two-country general equilibrium model with risk-averse agents and segmented financial markets, tariff volatility enters the UIP condition as a risk-premium wedge and the Euler equation as a precautionary-savings wedge, so that uncertainty depreciates the currency even as the tariff level pushes toward appreciation. The model delivers an identifying sign pattern: among the model’s sign-normalized shocks, only an uncertainty shock pairs currency depreciation and falling equity prices with an unchanged interest-rate differential—a pattern that neither tariff-level nor convenience-yield shocks reproduce. To measure the policy signal agents actually faced, we build TiRADE, a timestamped database of every U.S. tariff rate communicated between January 2025 and May 2026 — speeches, social media posts, and executive actions—of which 71 percent never appear in the statutory record. In high-frequency windows around these announcements, a one-standard-deviation rise in tariff uncertainty depreciates the dollar by 0.24 percent, lowers equities by 0.67 percent, and moves the interest differential by a precisely estimated zero; the covered (CIP) component of the dollar’s convenience yield does not reprice in these windows, and generic risk-off episodes outside them move the dollar the opposite way, the safe-haven direction. Estimating the model on the event-study responses, with the steady state disciplined by U.S. external-balance-sheet and trade data, we find markets priced the announced tariffs as largely transitory, so the uncertainty channel — not the tariff level, valuation effects, or covered convenience-yield erosion — accounts for the dollar’s depreciation at announcement frequencies.

JEL-codes: E0 F3 F40 (search for similar items in EconPapers)
Date: 2026-01
New Economics Papers: this item is included in nep-dge, nep-ifn, nep-int and nep-opm
Note: AP EFG IFM
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.nber.org/papers/w34728.pdf (application/pdf)
Access to the full text is generally limited to series subscribers, however if the top level domain of the client browser is in a developing country or transition economy free access is provided. More information about subscriptions and free access is available at http://www.nber.org/wwphelp.html. Free access is also available to older working papers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:34728

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w34728
The price is Paper copy available by mail.

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().