Currency market reactions to U.S. tariff shocks: cross-country evidence from the 2025 trade announcement

This research examines the impact of the U.S. tariff announcement on 2 April 2025 on the currency exchange rates for some of its major trading partners. Literature addresses the effects of equity market aftershocks on trade policy but misses the impact of trade policies on currency exchange rates. Using event study methodology, the average abnormal return (AAR) and cumulative average abnormal return (CAAR) over a 31-day event window are estimated using the U.S. Dollar Index as the market’s benchmark. It is an effective means of measuring the size and timing of market responses. Countries exhibiting high exposure to trade with the US, such as China and South Korea, have higher levels of abnormal returns, while more diversified economies, such as Europe and Great Britiain, will respond less dramatically and for shorter periods compared to those of high trade-exposed nations. Emerging market currencies like the Indian Rupee and the Mexican Peso will exhibit moderate to small but very volatile adjustments in their value. The authors find that there are significant differences between countries’ exchange rate responses to tariff shocks based on their reliance on trade, level of financial integration, and the characteristics of the market. These differences have major policy implications both for international investors and for policymakers to consider.