What Do Asset Prices in April 2025 Say About Demand for the Dollar?

We interpret exchange rate and yield curve responses to the April 2, 2025 U.S. tariff announcement through the lens of an equilibrium model capturing the portfolio balance mechanism. Disciplined by price elasticities from QE announcements, a 3-12% decline in the demand for dollar bonds (relative to annual U.S. GDP) accounts for the dollar depreciation and rise in dollar yields during this episode. News of a gradual rebalancing out of dollar bonds is consistent with immediate price impact since asset prices are forward-looking. Lower dollar bond demand was accompanied by higher risk aversion, which explains the cross-section of responses across currencies.