The Week in Numbers: Falling Tariffs, Soaring Eagle

The U.S. dollar’s trajectory in late 2025 has become a focal point for investors navigating a complex interplay of trade policy shifts and global capital flows. While the Trump administration’s America First Trade Policy has driven average effective tariffs to their highest level since 1933 (18.6% as of August 2025) [6], selective tariff reductions with key partners like the EU and Japan are creating asymmetric opportunities in emerging markets and dollar-denominated assets.

The Dollar’s Dilemma: Weakening Amid Trade Certainty

The U.S. Dollar Index (DXY) stood at 98.245 as of September 4, 2025, down from a July peak of 99.97 [2]. This marginal weakening contrasts with theoretical expectations that higher tariffs would bolster the dollar by increasing U.S. export competitiveness. Instead, broader economic forces—soaring inflation, legal challenges to tariffs, and geopolitical realignments—are reshaping capital flows.

Recent trade agreements have injected stability into critical corridors. The U.S.-EU deal, which reduced the baseline tariff on most EU goods to 15% (from 25%) [5], has stabilized transatlantic trade flows, mitigating disruptions to global supply chains. Similarly, the U.S.-Japan agreement, slashing tariffs on Japanese imports to 15% [6], has boosted Japanese corporate earnings by an estimated 3 percentage points [1]. These reductions have curtailed capital flight from emerging markets linked to EU and Japanese trade networks, such as South Korea and Southeast Asia, where export-dependent economies are now less exposed to abrupt tariff escalations.

Emerging Markets: A Calculated Rebalancing

Emerging markets are recalibrating their exposure to dollar-denominated debt. According to J.P. Morgan Global Research, rising U.S. Treasury yields have made dollar borrowing more costly for emerging economies, prompting a shift toward alternative currencies like the Chinese renminbi and Swiss franc [5]. This trend is amplified by the U.S. fiscal deficit, which has widened to 6.2% of GDP in 2025 [4], raising concerns about long-term dollar stability.

However, sector-specific opportunities persist. For instance, the U.S. suspension of the de minimis exemption for low-value shipments has spurred demand for logistics and e-commerce infrastructure in emerging markets [5]. Additionally, the 15% tariff cap on EU and Japanese goods has created a “tariff buffer” for countries like Mexico and South Korea, which maintain preferential access under USMCA and bilateral agreements.

Dollar-Denominated Assets: A Tale of Two Markets

Investors in dollar-denominated assets face a bifurcated landscape. On one hand, the Federal Reserve’s decision to delay rate cuts in 2026 [6] has supported yields on U.S. Treasuries, making them attractive to cash-strapped emerging markets. On the other, the Trump administration’s threat to “unwind” trade deals with the EU, Japan, and South Korea—pending a Supreme Court ruling on tariff legality [2]—has introduced volatility.

The legal uncertainty is particularly acute for copper and steel sectors. A 50% tariff on copper imports [3] has already driven prices up by 30% in tariff-sensitive industries [6], while the Federal Reserve’s tighter monetary policy has reduced the projected number of rate cuts in 2026 by one [1]. This duality creates a risk-rebalance scenario: investors may hedge against dollar weakness by allocating to commodities or emerging market equities in sectors insulated from U.S. tariff shocks.

Strategic Implications for Investors

The interplay of falling tariffs in key trade corridors and rising tariffs in others demands a nuanced approach. For emerging markets, the U.S.-EU and U.S.-Japan agreements offer a temporary reprieve from capital outflows, particularly in technology and manufacturing sectors. However, the broader 18.6% average tariff rate [6]—projected to generate $2.2 trillion in revenue over a decade—poses inflationary risks that could erode the dollar’s appeal.

Investors should prioritize:
1. Emerging market equities in tariff-insulated sectors (e.g., services, renewables).
2. Dollar-denominated bonds from countries with stable trade relations with the U.S. (e.g., Japan, South Korea).
3. Commodity hedges against inflationary pressures from U.S. tariffs on metals and energy.

As the Supreme Court deliberates on the legality of Trump’s tariffs [2], the coming months will test whether trade policy can stabilize the dollar’s long-term trajectory—or further fragment global capital flows.

Source:
[1] Short-Run Effects of 2025 Tariffs So Far - Yale Budget Lab [https://budgetlab.yale.edu/research/short-run-effects-2025-tariffs-so-far]
[2] Trump files appeal to Supreme Court, says US may 'unwind' deals [https://finance.yahoo.com/news/live/trump-tariffs-live-updates-trump-files-appeal-to-supreme-court-says-us-may-unwind-deals-if-it-loses-case-175804560.html]
[3] 2025 U.S. Tariffs Update - New Trade Policies & [https://zonos.com/docs/guides/2025-us-tariff-changes]
[4] US Dollar's Shifting Landscape: From Dominance to Diversification [https://am.gs.com/en-us/advisors/insights/article/2025/dollars-shifting-landscape-from-dominance-to-diversification]
[5] Discover this week's must-read finance stories [https://www.weforum.org/stories/2025/09/emerging-economies-explore-dollar-debt-alternatives-and-other-finance-news-to-know/]
[6] State of U.S. Tariffs: August 7, 2025 - Yale Budget Lab [https://budgetlab.yale.edu/research/state-us-tariffs-august-7-2025]