What role did U.S. tariffs and fiscal policy play in the dollar’s 2025 decline according to major financial research houses?
Executive summary
Major financial research houses and academic teams attribute much of the dollar’s 2025 weakness to the interaction of sweeping tariff hikes and concurrent fiscal policy changes: tariffs acted as a supply-side tax that raised inflationary expectations and slowed GDP, while deficit-financed tax cuts and policy uncertainty eroded confidence in U.S. assets and pushed foreign investors to rebalance away from dollar assets [1] [2] [3]. The result, according to a cluster of analyses from Goldman Sachs, JP Morgan, CEPR-linked academics and international institutions, was an atypical depreciation driven more by portfolio reallocation and elevated long-term risk premia than by traditional trade-balance channels alone [2] [4] [3] [5].
1. Tariffs as a direct inflationary and growth shock
Researchers at Yale’s Budget Lab and a range of macro teams model the 2025 tariff package as a broad-based import tax that raised consumer prices materially and subtracted from output — the April 2 tariffs alone imply a short-run consumer-price rise of roughly 1.3% and a 0.5 percentage-point hit to U.S. real GDP growth in 2025, with larger effects when all 2025 measures are combined [1] [6]. That direct inflation channel matters for the dollar because import-price passthrough and higher domestic prices alter real returns on dollar assets and complicate the Federal Reserve’s policy reaction, a dynamic explicitly highlighted in short-run tariff analyses [6] [7].
2. Financial-market transmission: portfolio rebalancing and risk premia
Multiple high-frequency and institutional studies argue the dominant transmission to the currency was through asset markets: tariff announcements triggered equity declines and a reallocation by foreign investors away from U.S. equities, which required selling dollars and U.S. Treasury exposure, producing on-impact dollar depreciation rather than the textbook appreciation [3] [8]. CEPR and related work document a novel pattern in 2025 — falling short-term yields alongside sharply rising long-term yields — that implies rising term premia and investor demands for higher compensation to hold long-dated U.S. debt, reinforcing downward pressure on the dollar [5] [9].
3. Fiscal policy amplified the pressure by raising sovereign risk
Major reports link the tariff wave to a simultaneous fiscal “switch” — large tax cuts and deficit-financed measures — that widened expected deficits and, in several accounts, raised sovereign risk perceptions; Moody’s rating action and IMF/analyst warnings are used to argue that rising fiscal concerns lifted U.S. risk premia and weakened demand for dollar assets [10] [11] [9]. The Budget Lab and other fiscal simulations also estimate tariffs will raise revenues over time but, coupled with slower growth and the new tax law, create a volatile fiscal picture that undermined confidence in the U.S. policy regime [12] [1].
4. Where big houses converge — and where they diverge
Goldman Sachs frames tariffs and the broader policy mix as eroding confidence in U.S. institutions and investor appetite for U.S. assets, forecasting persistent dollar weakness tied to policy uncertainty and growth effects [2]. JP Morgan is more sanguine on real supply-chain impacts and expects somewhat smaller household purchasing-power effects, implying a less severe currency shock if exemptions or adjustments persist [4]. Academic CEPR pieces emphasize portfolio and derivative-market mechanics as central to explaining the unexpected depreciation, while EU and policy-modeling teams stress the supply-shock and tighter financing-conditions channel [3] [5] [7].
5. Motives, implicit agendas, and interpretation risks
Analysts’ emphasis differs by institutional vantage: investment banks (Goldman, JP Morgan) balance client-facing risk narratives with market positioning advice and may frame persistence versus transience of dollar moves in ways that influence trading; academic and European policy pieces tend to foreground systemic risks to open markets and often highlight retaliatory scenarios and political economy motives behind tariff-driven outcomes [2] [4] [13] [7]. Some public-interest research (e.g., Budget Lab, CEPR) underscores distributional and macro costs of tariffs, which informs their interpretation that the currency move reflects lost policy credibility as much as standard trade mechanics [1] [9].
6. Bottom line: tariffs set the stage; fiscal policy and market confidence finished the job
The prevailing narrative among major research houses is that tariffs were the catalyst — imposing inflationary and growth costs — but that fiscal policy choices and the resulting loss of confidence in U.S. macro policy produced the atypical portfolio outflows, higher long-term yields and a sustained dollar depreciation in 2025; disagreements remain on magnitude and persistence, with JP Morgan offering a less severe scenario if supply-chain effects prove muted and exemptions hold [1] [2] [4] [3] [5]. Where reporting and models diverge, it is largely over how much of the dollar move was driven by mechanical trade-balance adjustments versus confidence-driven asset reallocation and higher sovereign risk premia [13] [9].