Battered Dollar Drifts Lower, Spooked by Tariff News

The U.S. dollar, long the world’s default safe-haven currency, has entered a period of sustained decline this year as a crescendo of tariff announcements and retaliatory trade measures has upended global economic stability. By early April 2025, the greenback had weakened against major currencies, with the S&P 500 and NASDAQ plummeting 17.4% and 22.3%, respectively, from February peaks—a stark reflection of investor anxiety over protectionist policies.

A Currency in Crisis

The dollar’s retreat began in February 2025 amid escalating U.S. tariff threats, but it accelerated after April 2, when President Biden signed an executive order imposing a 10% minimum tariff on all imports from non-NAFTA countries, escalating to 25% for 60 nations by April 9. These moves, framed as a bid to “rebalance” trade deficits, instead triggered a domino effect of retaliatory measures. China’s 84% tariffs on U.S. goods, Canada’s counter-tariffs on potash and energy, and the EU’s threats to match U.S. duties created a toxic cocktail of uncertainty.

The Inflationary Feedback Loop

Tariffs functioned as a blunt tax on imports, pushing prices higher. The April 2 measures alone raised the U.S. average effective tariff rate by 11.5 percentage points, triggering a 1.3% short-term price surge, according to the Treasury Department. When combined with prior 2025 tariffs, the total inflationary impact reached 2.3%, with apparel prices spiking 17% and new cars rising 8.4%.

The Federal Reserve, caught between curbing inflation and avoiding a recession, halved its projected rate cuts for 2025 to just 50 basis points. This hesitation eroded the dollar’s interest rate advantage.

Retaliation and Recession Risks

Foreign countermeasures deepened the dollar’s woes. Canada’s economy, heavily reliant on U.S. trade, faced a 2.1% long-term contraction, while China’s yuan (CNY) depreciated 1.6% against the dollar by mid-April—a sign of Beijing’s readiness to use currency devaluation as a buffer. The IMF warned that a 10% U.S. tariff hike, with retaliation, could slash global GDP by 0.5% by 2026, with half the damage stemming from “sentiment-driven contractions.”

Winners and Losers in the Tariff Wars

The policies disproportionately hurt lower-income households, which lost $3,000 annually on average due to price hikes, versus $8,100 for top earners—a regressive outcome that risks social and political backlash. Meanwhile, sectors like autos and textiles faced immediate pain:

A Dollar in Reverse Gear

The dollar’s decline reflects not just tariffs but a broader loss of confidence in U.S. economic leadership. The greenback’s share as a global reserve currency has slipped to 58%, its lowest since 2013, as central banks diversify holdings. Even U.S. exporters, initially shielded by tariffs, face headwinds: retaliatory measures have cut long-term U.S. exports by 18.1%, undermining the policy’s stated goal of rebalancing trade.

Conclusion: A Dollar Divided

The dollar’s fall underscores the high cost of protectionism. While tariffs aimed to shield domestic industries, they’ve instead fueled inflation, stifled trade, and destabilized markets. With global GDP projected to shrink by 0.5% and U.S. households facing $3,800 in annual losses, the policy’s benefits remain elusive. Investors should brace for further dollar weakness unless there’s a swift de-escalation of trade conflicts.

The path ahead is fraught. As J.P. Morgan analysts noted, “The Fed’s hands are tied by tariff-driven inflation, and businesses are paralyzed by policy uncertainty.” In this environment, the dollar’s decline isn’t just a currency story—it’s a warning that economic nationalism comes at a steep price.