US-China Tariff Relief Drives Dollar Up, Treasuries Down
The US dollar surged and Treasury yields climbed on Monday as markets responded positively to news that the United States and China have agreed to temporarily ease trade tensions. The move sparked a global rally in risk assets, reversing months of investor caution triggered by punitive tariffs and geopolitical uncertainty.
A widely watched index of the dollar’s strength rose by as much as 1%, buoyed by the announcement that both economic giants would reduce existing tariffs for a 90-day period. In parallel, US Treasuries retreated sharply, with the yield on the two-year note climbing as much as 10 basis points to 3.99% — a reflection of easing investor demand for safe-haven government bonds. The shift prompted traders to reassess their expectations for interest rate cuts from the Federal Reserve.
“This kind of coordinated tariff relief, even if temporary, changes the investment landscape,” said Nigel Green, CEO of deVere Group. “It clears a path for businesses to recalibrate their outlook, and for markets to rally on something more than just hope.”
Following talks in Geneva over the weekend, US and Chinese negotiators agreed to scale back their respective levies. The United States’ combined tariffs of up to 145% on Chinese imports will be lowered to 30%, while China’s 125% duties on US goods will fall to 10%. The three-month truce gives both sides additional time to work toward a more permanent resolution.
Market optimism extended beyond US borders. The Japanese yen and Swiss franc — typically safe-haven currencies — both weakened, while European government bonds also sold off. Germany’s two-year yield rose 11 basis points to 1.90%. Equities rallied strongly in both US and European markets.
“This is a pain trade for bears,” said David Kruk, head of trading at La Financière de l’Echiquier. “These are cuts in tariffs which are much deeper than what was expected. There is no more dip to buy, so if you were not invested before, it’s really hard to go in now.”
The euro slid 1.5% against the dollar to $1.1084 — its biggest one-day drop this year. Traders had previously sought the euro as a haven amid the downturn in US markets, but the renewed dollar strength reversed that trend.
“This is positive for G-10 risk, especially the Antipodean currencies and the US dollar,” said Valentin Marinov, head of G10 FX strategy at Credit Agricole SA. “Easing US growth fears should further help restore market confidence in USD-denominated assets.”
The improved trade outlook also prompted a swift repricing of monetary policy expectations. Traders now see only a 25-basis-point rate cut from the Fed in September, compared to earlier forecasts of a cut as soon as July. For the European Central Bank, anticipated rate reductions fell below 50 basis points for the rest of the year, down from more than 60 at the close of the previous week. A similar reduction in expectations was seen for the Bank of England.
“We’d be inclined to follow this recent hawkish momentum in US rates,” said Jordan Rochester, head of macro strategy for EMEA at Mizuho International Plc. “We are biased to selloffs in the long end.”
Despite Monday’s upbeat reaction, some analysts remain cautious about the longer-term trajectory of US assets.
“Even with tariff relief, concerns around the US hard-data outlook persist,” said Mohamad Al-Saraf, an analyst at Danske Bank. “Potential asset allocation shifts away from US assets remain medium- to longer-term headwinds for the greenback.” As the clock begins ticking on the 90-day window, investors and businesses alike will be watching closely to see if the latest truce marks the beginning of lasting trade peace — or simply another pause in a prolonged economic standoff.
