Bank of England publishes research showing US dollar response to tariffs depends on retaliation and notes unusual rise in long-maturity Treasury yields

The Bank of England published a staff working paper analysing how exchange rates respond to tariff actions, based on a new econometric “tariff-shock” database. The paper finds that the US dollar typically appreciates when US tariffs are imposed unilaterally, but tends to depreciate when other countries retaliate, concluding that the US dollar’s depreciation after the US tariff announcement on 2 April 2025 was consistent with these patterns and with models featuring dominant currency pricing. The database tracks tariff announcements, threats and implementations by the US, China, the euro area and Canada in 2018–2020 and in 2025, scaling shocks by both tariff rates and the share of imports affected, and treating a US shock as “retaliated” if a foreign response occurs within seven days. Using local-projection estimates, the analysis highlights that retaliation can more than offset the conventional appreciation channel, particularly for US “global” tariff actions beyond bilateral US–China measures; it also notes that the 2 April 2025 episode saw the US dollar fall by over 6% against the euro alongside a much larger effective US tariff shock (around 14%). Extending the analysis to bond markets, the paper finds that while short-maturity US Treasury yields fell after tariff shocks in both samples, the sharp and persistent rise in long-maturity US Treasury yields in 2025 was unprecedented relative to 2018–2020. The authors plan to update the tariff-shock database periodically, and the working paper is presented as research in progress to elicit comments rather than Bank of England policy.