Dollar Eyes Weekly Rise Amid US-China Trade Talks, But Structural Weakness Lingers

The U.S. dollar has edged higher this week ahead of critical U.S.-China trade talks, but its long-term trajectory remains clouded by escalating tariff wars, Federal Reserve policy shifts, and a global economic slowdown. The greenback’s modest rebound—up 0.8% against a basket of currencies this week—reflects short-term optimism around de-escalation hopes, even as the structural forces weighing on the dollar are far from resolved.

The Trade Talks Crucible

This week’s high-level talks between U.S. Treasury Secretary Scott Bessent and Chinese Vice Premier He Lifeng mark the first in-person negotiations since tariffs on Chinese goods surged to 145% earlier this year. While markets have priced in cautious optimism—sparking a 0.6% rally in Asian equity indices—the reality is far murkier.

The U.S. is reportedly considering a phased tariff cut from 145% to 50-54%, but Beijing has shown little appetite for concessions. “China’s stance is clear: no meaningful deal unless tariffs are fully removed,” said Eurasia Group analyst Wang Dan, noting that Beijing views the talks as a tactical pause rather than a breakthrough.

The yuan (CNY) has depreciated 3% since March, trading near 7.40 as Chinese policymakers prioritize domestic stimulus over currency defense.

The Tariff Tsunami and Economic Fallout

The trade war’s economic toll is now undeniable. Chinese exports to the U.S. have collapsed by 60% in April, with cargo shipments to Los Angeles plummeting 35% year-on-year. Goldman Sachs warns that 16 million jobs—2% of China’s workforce—are at risk in sectors tied to U.S. trade. Meanwhile, U.S. GDP contracted by 0.3% in Q1 2025, driven by businesses stockpiling goods ahead of tariffs.

The Fed’s dilemma is stark: while inflation remains elevated, a recession looms. The central bank held rates steady at its May meeting but faces pressure to cut by year-end. “Three rate cuts by September are now priced in,” said MUFG strategist George Goncalves. A dovish Fed would further weaken the dollar, especially against the euro and yen.

Structural Weakness vs. Cyclical Hope

The dollar’s near-term bounce reflects hopes that trade talks will avert a worst-case scenario—such as China revoking its “de minimis” tariff exemption for low-value goods. But the bigger picture is grim. The U.S. trade deficit now accounts for 4.2% of GDP, a chronic drag on the currency.

Investors are also fleeing U.S. assets. Foreign ownership of U.S. equities totals $18.5 trillion, and even a 5% exodus would trigger $900 billion in USD selling—a force that would swamp any short-term trade optimism.

The Bottom Line

The dollar’s weekly rise is a flicker of hope in a storm. While talks may yield minor tariff truces, a lasting resolution remains years away. Fed easing, structural deficits, and global growth slowdowns ensure the USD’s long-term decline.

Investors should prepare for volatility—the next few months will test whether trade diplomacy can outweigh economics. But with China’s manufacturing PMI hitting a 16-month low and U.S. consumer confidence near 2020 lows, the odds favor further USD weakness.

In the words of Morgan Stanley’s Robin Xing: “The dollar’s rally this week is a tactical pause in a bear market. The structural headwinds are too strong.”

Data sources: IMF, Federal Reserve, Goldman Sachs, Morgan Stanley.