The Dollar's Dilemma: How Tariff Turmoil is Redefining Global Economic Risk

In April 2025, Bank of England (BoE) policymaker Megan Greene delivered a stark warning: the interplay of U.S. tariffs and the dollar’s unpredictable behavior is creating a "landscape of heightened unpredictability" for global investors. Her remarks at the Delphi Economic Forum underscored how trade wars and currency dynamics are upending traditional economic models, leaving central banks and markets scrambling to navigate uncharted waters.

The Dollar’s Unruly Behavior

Greene’s central argument hinges on a paradox: U.S. tariffs were expected to strengthen the dollar by boosting demand for safe-haven assets, but instead, the greenback has weakened. This defies historical patterns where trade surpluses from tariffs typically lift a currency. The reveals a sharp decline in the dollar’s value, even as U.S. trade deficits worsened.

The depreciation complicates inflation forecasts. A weaker dollar should ease import costs for other economies, dampening inflation—a scenario playing out in the UK, where CPI has dipped to 2.1% in Q1 2025. However, Greene cautions that this masks deeper risks: retaliatory tariffs and supply chain disruptions could soon reverse the trend, creating "whiplash" effects for businesses and investors alike.

Reserve Currency Risks and Geopolitical Tensions

Greene also highlighted the existential threat to the dollar’s reserve status. Prolonged trade conflicts, she argued, could accelerate the diversification of global reserves away from the dollar. China’s recent moves to denominate more trade in yuan, coupled with the EU’s push for a digital euro, suggest a gradual shift. The shows the dollar’s share has slipped from 62% to 58% since 2020, while yuan holdings have nearly doubled.

This erosion of the dollar’s dominance introduces volatility. Investors in dollar-denominated assets—such as U.S. Treasuries or multinational equities—now face dual risks: currency fluctuations and geopolitical realignments. "The era of the dollar as the world’s stable anchor is fading," Greene said, warning of "profound implications" for portfolio allocations.

Inflation’s Uncertain Path and Market Volatility

The inflation puzzle is central to the BoE’s dilemma. While tariffs on Chinese goods have redirected exports to Europe, temporarily lowering prices in the UK, Greene stressed that this "disinflationary window" is fragile. The shows UK inflation dipping below the EU’s for the first time since 2020, but supply chain bottlenecks and energy costs could quickly reverse this.

Meanwhile, financial markets are reacting nervously. The reflects a growing divergence, with European equities outperforming U.S. stocks amid dollar weakness. However, sharp corrections in tech stocks and commodities markets—driven by fears of a "tariff recession"—highlight the instability.

Strategic Implications for Investors

Greene’s analysis points to three key strategies for investors:
1. Diversify beyond the dollar: Allocate to currencies like the euro, yen, or yuan, which may benefit from dollar declines.
2. Focus on inflation hedges: Gold and real estate have historically outperformed during periods of currency uncertainty.
3. Avoid overexposure to tariff-hit sectors: The reveal steep declines as trade wars disrupt supply chains.

The BoE’s cautious stance—Greene and Deputy Governor Sarah Breeden have ruled out aggressive rate hikes—adds another layer of uncertainty. With policy tools constrained, investors must rely more on market signals.

Conclusion: Navigating the New Economic Frontier

Greene’s warnings crystallize a pivotal moment: trade wars and currency volatility are reshaping the global economy in ways not seen since the 1930s. The dollar’s decline, while surprising, reflects deeper shifts in trade patterns and reserve preferences. Investors ignoring these trends risk significant losses.

Data underscores the urgency: the World Bank estimates that a 10% dollar depreciation could add $1 trillion to global trade costs, while the IMF warns that prolonged tariffs could shave 0.5% off global GDP annually. For now, the BoE’s "wait-and-see" approach may buy time, but markets demand clarity. Until then, resilience—not precision—will define successful investment strategies.