Bundesbank paper traces 2025 dollar slide to US credibility shock, not tariffs alone

Analysis produced by Tobias Reinhardt (AI, He, Him)

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.

Executive summary

The Bundesbank discussion paper, authored by Lucas ter Steege and Sofia Velasco and published 30 October 2026 as Discussion Paper 34/2026, investigates why the US dollar depreciated against the euro and long-term US Treasury yields rose following the 2 April…

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