Geopolitical Risks in U.S.-China Trade Relations: Currency Volatility and Global Equity Market Implications

The U.S.-China trade war, now in its third year, has evolved into a defining geopolitical risk for global markets. Tariff escalations, currency manipulation, and supply chain reconfigurations have created a volatile environment where investors must navigate interconnected risks. This analysis examines how U.S.-China trade tensions have driven USD/CNY exchange rate volatility and explores the cascading effects on global equity markets, drawing on recent data and policy developments.

Currency Volatility: A Double-Edged Sword

The U.S. and China have weaponized tariffs as a strategic tool, with the U.S. raising duties on Chinese goods to 145% and China retaliating with 125% tariffs on American exports by April 2025, according to a dollar-to-yuan analysis. These measures have directly impacted the USD/CNY exchange rate, which fluctuated between 7.1540 and 7.3499 in 2025, averaging 7.2409 CNY, as noted in the Q2 2025 market review. The People's Bank of China's tacit acceptance of yuan devaluation-a move to bolster export competitiveness-has further amplified volatility. By October 2025, the yuan was projected to trade within a 7.128–7.346 range, closing at 7.237 CNY, a 0.5% increase from earlier in the year, per a yuan forecast.

This volatility reflects a broader pattern: as trade tensions escalate, the yuan weakens, prompting U.S. policymakers to threaten additional sanctions, which in turn destabilizes the currency further. Technical indicators, such as the MACD line falling below its signal line in late August 2025, signaled a downtrend in that analysis, though forecasts for October suggest a rebound driven by market anticipation of policy shifts.

Global Equity Markets: A Tale of Two Halves

The impact on global equities has been uneven. In July 2025, U.S. markets rebounded as trade tensions temporarily eased, with the S&P 500 and Nasdaq Composite rising on the passage of the One Big Beautiful Bill Act (OBBBA), which reduced the risk of further tariff escalations, according to the Q2 2025 market review. However, emerging markets (EM) and developed markets outside the U.S. showed mixed responses. While EMs demonstrated resilience-driven by China's efforts to diversify trade partners-developed markets declined due to geopolitical uncertainty and weaker economic data, as also discussed in the Q2 2025 market review.

By Q3 2025, optimism around AI-driven growth and a Fed rate cut spurred a global equity rally. China, Taiwan, and South Korea benefited from progress in U.S.-China trade negotiations, while Japan and the UK outperformed due to expectations of monetary easing, according to a Q3 2025 markets review. Yet, underlying risks persisted. Companies worldwide accelerated supply chain diversification to reduce reliance on both the U.S. and China, signaling long-term structural shifts noted in the Q3 2025 markets review.

Q4 2025: A New Volatility Regime

The final quarter of 2025 marked a pivotal shift in global market dynamics. U.S. equity markets became the new epicenter of volatility, surpassing EM and EAFE (developed markets outside the U.S.) in both implied and realized volatility measures, as highlighted in the Q2 2025 market review. This shift reduced the sensitivity of EM volatility to U.S. market movements, with EM-equity implied volatility beta to U.S. markets dropping to 0.4-the lowest since 2019, a point emphasized in the Q2 2025 market review.

The implications for portfolio management were profound. Short-horizon risk-parity allocations across the U.S., EM, and EAFE converged to equal weights, a rare outcome that suggests a structural reconfiguration of how volatility is priced and managed, a trend identified in the Q2 2025 market review. Analysts attribute this to the U.S. Federal Reserve's aggressive policy adjustments and the lingering uncertainty surrounding U.S.-China trade negotiations.

Strategic Implications for Investors

For investors, the U.S.-China trade conflict underscores the need for adaptive risk management. Currency hedging strategies, particularly for USD/CNY exposure, have become critical. Diversification across geographies and sectors-especially those less reliant on U.S.-China trade flows-can mitigate sector-specific shocks. Additionally, the shift in volatility dynamics suggests that traditional EM risk premiums may no longer offer the same diversification benefits they once did.

The coming months will test the resilience of global markets. While historical precedents suggest equities can recover from trade tensions, the current geopolitical context-marked by decoupling and technological competition-presents unique challenges. Investors must remain vigilant, balancing tactical adjustments with a long-term perspective on structural shifts in global trade and finance.