2025 Outlook Series | Dollar & US Treasury Outlook: What’s Driving Market Moves Post-Trump Election? | Blog

Since Trump’s confirmation as the next president, the fervor around “Trump trades” has shown no signs of abating, with price movements of related assets primarily driven by rationales in three aspects: (1) inflation: anticipation of aggressive tariff policies that may push up inflation; (2) interest rates: tariffs and expanded fiscal spending may limit room for Fed rate cuts; and (3) government debt: greater fiscal expansion would also widen the fiscal deficit, which would heighten U.S. debt default risks and dampen investor appetite for Treasuries.

Reflecting these considerations, the dollar and Treasury yields have risen sharply post-election, with the dollar breaking above 107 at one point, reaching a new 12-month high, and yields rebounding to six-month highs. But will this momentum persist? In this article, we examine whether the above market assumptions hold up and share our outlook for the dollar and Treasuries.

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I. Inflation: Limited Impact Expected from Tariff Hikes Based on Lessons from 2018~2019 Trade War

Let’s start with the conclusion: we do not think new waves of tariff hikes will have a significant inflationary impact. To support this argument, we can reference findings from a working paper on the 2018-2019 trade war by the U.S. National Bureau of Economic Research (NBER).

Let’s first look at how domestic prices responded to past tariff hikes on China. As shown in the left chart below, import prices of affected goods rose significantly, but pretty much in proportion with the imposed tariff rates. This means Chinese exporters have maintained their export prices, leaving U.S. importers to absorb most of the tariff burden. Interestingly, as shown in the chart on the right, downstream retail prices of these goods did not see a corresponding increase, suggesting the cost shock from tariffs was likely absorbed by retailers themselves.

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After the U.S. imposed higher tariffs on multiple countries in 2018, countries like Canada, China, the EU, and Mexico also imposed retaliatory tariffs on U.S. goods. Interestingly, unlike the case with Chinese exports, U.S. export prices did see a significant decline. Why did tariff hikes have such different effects on U.S. and Chinese exporters? The main reason lies in the nature of the affected goods: Chinese exporters enjoyed stronger pricing power as over 90% of the affected Chinese products are differentiated goods that are hard to substitute. By contrast, over half of the affected American products are non-differentiated goods for which for which substitutes are readily available (e.g. agricultural products). As a result, U.S. exporters had less pricing power and had to lower their prices to remain competitive or risk a significant decline in demand.

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Considering these empirical findings and the current market conditions, we draw two key conclusions:

With consumers being more price-sensitive these days, even in the face of new tariff hikes, retailers may find it difficult to pass the cost pressure onto consumers by raising the final retail prices.
In the past, the U.S. bore most of the tariff shocks as the affected imports goods affected by additional tariffs in 2018~2019 were easy to substitute. However, with supply chain diversification efforts now showing progress, if the more broad-based tariff hikes proposed by Trump are implemented, a greater share of non-differentiated goods will be affected, which would reasonably lead to lower import prices, thus having limited inflationary impact on consumer prices.

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