US-China Trade Truce Fuels Dollar’s Modest Rebound: Is This the Start of a Turnaround?

The US dollar edged toward its first weekly gain since mid-March 2025, climbing 0.3% by April 19 and pushing higher to 1.2% by April 26, as investors detected tentative signs of easing US-China trade tensions. While the conflict between the world’s two largest economies remains far from resolved, subtle shifts—including China’s quiet rollbacks of tariffs on critical US tech imports—have sparked cautious optimism. This article dissects the drivers behind the dollar’s rebound, the lingering risks, and what investors should watch next.

The Catalyst: China’s Unofficial Tariff Rollbacks

The turning point came on April 12, 2025, when Chinese customs agencies in Shenzhen quietly reduced retaliatory tariffs on US-made semiconductors (integrated circuits) to 0%, effectively reversing the 125% tariffs imposed earlier. While Beijing denied formal negotiations, traders at companies like Taihang Semiconductor confirmed the exemptions, which targeted eight tariff codes excluding memory chips. This move, likely aimed at shoring up China’s tech sector amid domestic shortages, was followed by reports of potential exemptions for US pharmaceuticals and medical equipment, per Bloomberg.

The semiconductor carve-out was a pragmatic step: China’s tech firms remain heavily reliant on US components, and domestic production gaps are widening. “This isn’t a full truce, but it’s a tactical concession that eases pressure points,” said Caijing analyst Li Wei.

Market Reactions: A Fragile Optimism

Investors interpreted these moves as a sign that both sides are seeking pathways to de-escalate. The dollar index (DXY) rose 0.25% the week of April 17, its first weekly gain since mid-March, while the yen—often a safe-haven proxy—fell 0.66% against the dollar as trade-war fears eased. European equities, particularly in autos and industrials, rallied, with the STOXX 600 gaining 2.9% for the week.

However, skepticism persists. China’s Commerce Ministry reiterated there were “absolutely no negotiations” with the US, and tariffs on most goods remain at 125%. Meanwhile, President Trump’s conflicting claims—such as alleging a direct call with Xi Jinping, denied by Beijing—add noise to the signal. “The market is pricing in less bad rather than a breakthrough,” noted City Index’s Fiona Cincotta.

Risks Looming: Tariffs, Tech, and Geopolitics

1. The Tariff Ceiling: While some exemptions exist, the US still imposes 145% tariffs on Chinese goods, with China retaliating at 125%. These rates are unsustainable for both economies. US agricultural exports to China fell 34% in Q1 2025, while Chinese semiconductor imports from the US dropped 40%, per customs data.

2. Tech Export Controls: Beyond tariffs, the US has added over 50 Chinese entities to its Entity List since March 2025, targeting quantum computing and AI. China has reciprocated with its “unreliable entities list,” blacklisting 27 US firms.

3. Geopolitical Volatility: Tensions over Taiwan and human rights remain unresolved. Any misstep—such as a new US sanctions round or Chinese military drills—could reignite the conflict.

Fed Policy: A Double-Edged Sword

The Federal Reserve’s dovish pivot has also supported the dollar. With 1-year inflation expectations falling to 6.5% in April, markets now price in an 8% chance of a May rate cut and a 90% chance by June. This contrasts with the ECB, which faces deflationary pressures from US tariffs and may cut rates by June.

However, the Fed’s caution is a double-edged sword. A weaker dollar could boost US exports, but it risks reigniting inflation if energy or commodity prices rebound. “The Fed is walking a tightrope,” said Bank of Japan analyst Takeshi Miyao.

Conclusion: A Fragile Truce, Not a Deal

The dollar’s modest rebound reflects reduced escalation risks, not a resolution. While China’s semiconductor exemptions and US tariff pauses buy time, structural issues—such as tech decoupling and Taiwan—remain unresolved. Investors should focus on two key metrics:

• Semiconductor Trade Data: A rebound in US-China semiconductor trade (currently down 40% year-on-year) would signal deeper de-escalation.
• Dollar Index Stability: If the DXY holds above 101.50—a level breached briefly in late April—the dollar’s recovery may gain traction.

For now, the dollar’s rally is fragile. As long as tariffs remain at punitive levels and diplomatic channels remain blocked, the greenback’s gains are likely to remain muted. “This isn’t a turnaround—it’s a pause in freefall,” warned Reuters strategist John Kilduff. Investors should prepare for volatility ahead.