Bundesbank paper traces 2025 dollar slide to US credibility shock, not tariffs alone
This discussion paper from two Bundesbank researchers uses high-frequency data and a volatility-based econometric method to explain why the dollar fell and long-term Treasury yields rose after the April 2025 US tariff announcement, despite an initial risk-off reaction. It compares that episode with the 2018-2019 trade war to isolate distinct shocks driving currency and bond markets.
- The paper examines the US tariff announcement of 2 April 2025, which included a 10% baseline tariff on imports from 180 countries plus a reciprocal component.
- Researchers identify two structural shocks: a safe-haven shock and a separate US Institutional Credibility shock, using a heteroskedastic VAR model on high-frequency asset price data.
- The safe-haven shock explains most of the April 2025 equity price fall and volatility spike, while the US Institutional Credibility shock explains the subsequent dollar depreciation and rise in long-term US Treasury yields.
- The August 2019 tariff escalation, by comparison, was largely explained by safe-haven shocks, with term spreads compressing and the dollar appreciating as in a typical risk-off episode.
- The paper concludes the April 2025 episode was not simply a larger version of 2019 but involved an additional mechanism tied to rising Treasury risk premia.