US-China Trade Tensions Drive UBS's Downbeat Dollar Outlook for 2025

The U.S. dollar’s trajectory in 2025 is increasingly hinging on one critical variable: the state of U.S.-China trade relations. In a stark revision of its outlook, UBS has slashed its forecast for China’s 2025 GDP growth to 3.4%, down from an earlier estimate of 4%, citing the cascading effects of persistent U.S. tariffs and global economic slowdowns. The bank’s analysis underscores how trade tensions are reshaping not just China’s economy but also the broader currency landscape.

The Tariff Tsunami

At the heart of UBS’s downgrade is the impact of U.S. tariffs, which now apply to nearly all Chinese exports at an average rate of 145%. These levies are projected to shrink Chinese exports to the U.S. by two-thirds over the coming quarters and reduce total exports by 10% in dollar terms by year-end. The ripple effects are enormous: UBS estimates tariffs alone could knock over two percentage points off China’s GDP growth, even with aggressive fiscal and monetary stimulus.

The math is stark. China’s Q1 2025 GDP growth topped expectations at 4.5%, but that’s likely a mirage. “The first quarter was a false dawn,” says UBS economist Tao Wang. “The full brunt of tariff-driven export contractions will hit later in the year, when global demand weakens further.”

Fiscal and Monetary Firepower

To counteract the drag, UBS anticipates Beijing will deploy a 2%-of-GDP fiscal stimulus targeting domestic demand, alongside aggressive monetary easing. The People’s Bank of China is expected to cut interest rates by 30–40 basis points and reduce reserve requirements for banks, starting as early as this month. Yet these measures face an uphill battle.

The Uncertainty Factor

The report’s most striking admission is its “extremely large uncertainty” around tariff trajectories. While negotiations between Washington and Beijing could “roll back some hikes,” UBS warns that outcomes are “highly speculative.” This uncertainty isn’t just theoretical—it’s baked into currency markets. The yuan’s value is exquisitely sensitive to trade imbalances, and a 10% export drop would likely weaken it further against the dollar.

Why This Matters for the Dollar

UBS’s revised outlook ties the dollar’s strength to three interlinked forces:
1. Trade Dynamics: A weaker yuan would make U.S. exports relatively cheaper, potentially boosting U.S. GDP.
2. Policy Divergence: If China eases rates while the Fed holds rates higher, the interest rate differential could favor the dollar.
3. Geopolitical Risk: Escalating tariffs could trigger capital flight from China, further pressuring the yuan.

Yet there’s a paradox. A stronger dollar fueled by Chinese economic weakness might backfire globally, exacerbating the very “slower global growth” UBS cites as a key downside risk.

The Bottom Line

UBS’s analysis paints a clear picture: the U.S. dollar’s path in 2025 is a function of U.S.-China trade relations. With tariffs already cutting Chinese exports and GDP forecasts, the yuan faces downward pressure. However, any tariff rollback or surprise stimulus from Beijing could reverse the script.

The numbers tell the story: a 3.4% GDP growth (vs. the 5% official target), 10% export declines, and 2% fiscal stimulus all point to a fragile equilibrium. Investors watching the dollar should monitor two key metrics: the U.S.-China trade deficit and the People’s Bank of China’s policy moves. Without a resolution on tariffs, the greenback’s rise—or stumble—will be tied to Beijing’s ability to navigate this storm.

In short, the dollar’s fate in 2025 is no longer just about the Fed. It’s about whether two of the world’s largest economies can find a way off the trade battlefield.