Tariff Uncertainty and the U.S. Dollar

Standard models predict that a unilateral tariff appreciates the implementing country’s currency; in 2025, U.S. tariffs rose and the dollar fell. We show that tariff uncertainty can reverse the textbook prediction. In a two-country general equilibrium model with risk-averse agents and segmented financial markets, tariff volatility enters the UIP condition as a risk-premium wedge and the Euler equation as a precautionary-savings wedge, so that uncertainty depreciates the currency even as the tariff level pushes toward appreciation. The model delivers an identifying sign pattern: among the model’s sign-normalized shocks, only an uncertainty shock pairs currency depreciation and falling equity prices with an unchanged interest-rate differential—a pattern that neither tariff-level nor convenience-yield shocks reproduce. To measure the policy signal agents actually faced, we build TiRADE, a timestamped database of every U.S. tariff rate communicated between January 2025 and May 2026 — speeches, social media posts, and executive actions—of which 71 percent never appear in the statutory record. In high-frequency windows around these announcements, a one-standard-deviation rise in tariff uncertainty depreciates the dollar by 0.24 percent, lowers equities by 0.67 percent, and moves the interest differential by a precisely estimated zero; the covered (CIP) component of the dollar’s convenience yield does not reprice in these windows, and generic risk-off episodes outside them move the dollar the opposite way, the safe-haven direction. Estimating the model on the event-study responses, with the steady state disciplined by U.S. external-balance-sheet and trade data, we find markets priced the announced tariffs as largely transitory, so the uncertainty channel — not the tariff level, valuation effects, or covered convenience-yield erosion — accounts for the dollar’s depreciation at announcement frequencies.