The US announced reciprocal tariffs on April 2, dubbed Liberation Day, only to pause them for 90 days and provide exemptions. Trade tensions with China escalated but has eased of late. Policy-induced uncertainty caused US long-term treasury yields to rise and the USD to weaken, unusual in a typical risk-off scenario. This was likely due to several factors:
A shift in global asset allocation as US policy credibility was reassessed and diversification pursued.
The long-standing overweight USD-trade, based on US exceptionalism.
1 July 2025
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Volatile US policy - tariffs raising stagflation risks, and tax cut extensions raising government borrowing and interest rates.
Potentially weaker Fed support for growth - given recent high inflation and price levels, likely tariff passthrough, and tension between growth and inflation mandates.
Technical issues like higher margin calls and unwinding of leveraged ‘basis trades’ by hedge funds.
The question is whether this USD weakness - distinct from de-dollarization - has more legs. Safe-haven currencies strengthened since April, but the USD is still overvalued, US growth/profit outlook has been downgraded, and fiscal concerns still linger. A weaker USD could ease financial conditions in Emerging Markets like India. However, in the US, longer-end treasury yields are up, and asset prices could be challenged.
Recent policies could increase inflation, depending on final tariffs, alternate sourcing, and passthrough to consumers. Consumer demand and private investment will likely soften. Thus, stagflation risks may outweigh tariff benefits. Uncertainty is trumping liberation.
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