USD Response to Liberation Day Normal: Same Can’t be Said for US Treasuries – BoE

The sharp dollar depreciation following April’s tariffs announcement from the White House was not as unusual or unprecedented as market narratives and commentators made it out to be at the time, unlike the spike in 10-year Treasury yields, researchers at the Bank of England have found.

In a staff working paper dubbed Trading blows: The exchange-rate response to tariffs and retaliations, Daniel Ostry, Simon Lloyd and Giancarlo Corsetti, examine whether the wide-spread surprise about the US currency’s declines following Liberation Day was justified. Using econometric models, they find that the dollar behaved exactly as it did at previous times of tariff announcements, especially when those were met with expectations for retaliatory measures from other countries.

However, the historic move in 10-year US Treasury yields, which remain elevated to this day rather than reversing after a short period, was highly unusual, leading the researchers to conclude that monetary transmission mechanisms have become more complex in the past five years.

“Our econometric evidence for the period 2018-2020 shows that, when the rest of the world is expected to retaliate against a US tariff announcement, the USD can depreciate significantly, at odds with a widespread view, but in line with theoretical exercises,” the authors say. “In light of our evidence, the USD depreciation following the April 2nd 2025 is not surprising. The response of 10-year yields is, however, significantly different.” 

The researchers compare how exchange rates and Treasury yields responded to tariff announcements between the two years to 2020 and the months following Liberation day this year. The paper analyses 35 US tariff events between 2018 and 2020, 21 specifically on China, while 14 reflect events involving other US trade partners, primarily the EU, Canada and Mexico, often in addition to China.

They find that the dollar depreciated in both cases but the magnitude of the moves varied. “If anything the US dollar depreciation following April 2nd was too small given the size of the US tariffs,” they say.

Treasury yields showed a significant difference in their reactions. While in the 2018-2020 period US yields responded negatively both on the 2- and 10-year horizon, while those in Europe fared better.

“The same pattern does not repeat in 2025,” the authors write., noting that 2-year US yields did fall somewhat, but the reaction was muted. However, 10-year Treasury yields spiked significantly over time.

“The comparison of these results across the two periods thus points to a different, more complex, transmission mechanism [that] may have been at play in 2025 compared to the 2018-2020 period,” the authors say.