Impact of Trump's 2025 tariff policies on the USD/EUR and its volatility

Fernández i Sala, Enric; González Afonso, José Antonio; Morales Castaño, Paulo Cesar; Viñas i Tarradas, Jaume

Impact of Trump's 2025 tariff policies on the USD/EUR and its volatility

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Fernández i Sala, E, González Afonso, J, Morales Castaño, P, Viñas i Tarradas, J. Impact of Trump's 2025 tariff policies on the USD/EUR and its volatility. 2025. handle: http://hdl.handle.net/10230/70987

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Abstract

This study investigates the macroeconomic and financial effects of Donald Trump’s 2025 tariff policies on the USD/EUR exchange rate and its volatility. Following Trump’s re-election, the US administration imposed sweeping protectionist measures, triggering significant fluctuations in currency markets. Using an extended IS-LM framework—including Mundell-Fleming and Open IS-MP-PC models—the paper analyzes the theoretical mechanisms linking tariffs to exchange rate dynamics. The study identifies two key phases: a short-lived USD appreciation driven by initial market optimism, followed by a sharp depreciation due to retaliatory tariffs, heightened uncertainty, and rising risk premiums. To complement the theoretical framework, empirical analysis is conducted using time-series forecasting simulations: ARMAX-GARCH, random forests, and boosting, trained on macro-financial data from 1999 to 2025. The forecasts reveal that Trump’s tariff shock led to unusual exchange rate movements considering historical patterns, underscoring the role of expectations, political credibility, and uncertainty in shaping currency behavior. The paper concludes with a discussion on policy implications for the US, the Eurozone, and other major trade partners of the US; and the stability of the global economy.