Global Trade, Tariff Uncertainty and the U.S. Dollar

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

No 21062, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We analyze how tariff uncertainty affects exchange rates, motivated by the U.S. dollar’s depreciation after the 2025 tariff announcements. Standard macro-trade 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.

Date: 2026-01
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