Lessons From Financial Markets Since Liberation Day

This piece is part of a joint analysis assessing the Trump administration’s performance during the first ninety days of “liberation.”

Financial market reactions to President Donald Trump’s so-called Liberation Day tariffs on April 2 and their subsequent ninety-day pause have raised questions among policymakers and economists about some fundamental macroeconomic assumptions; specifically, will the dollar continue as the world’s reserve currency, and can Treasury bonds provide reliable portfolio diversification going forward?

It is too soon to have definitive answers to those questions. After all, U.S. trade policy continues to evolve. Moreover, financial market outlooks incorporate a myriad of factors—ranging from fiscal and monetary policy trends to technological innovation, asset valuations, and investor positioning—along with trade.

Even with those significant caveats, Liberation Day and its immediate aftermath offer useful lessons. Understanding where markets could be headed, and why, is important not just for the financial health of households and businesses owning U.S. assets, but also for the economic feedback loops that can influence policy decisions in the United States and overseas.

One important lesson from the last ninety days is that U.S. market exceptionalism should not be assumed. Yes, the dollar dominates global currency markets, appearing in nearly 90 percent of transactions. And yes, the U.S. Treasury market’s liquidity dwarfs that of other sovereign bond markets; the market depth and reliability of Treasury bonds have made them core central bank reserve holdings for decades.

However, April 2 fueled doubts around that exceptionalism. The initial market reaction to the aggressive global tariffs was more reminiscent of responses seen in destabilized emerging economies rather than in the United States. Between April 2 and 8, U.S. equities, government bonds, and the dollar all lost value, according to Bloomberg data. In just five trading days, the S&P 500 fell more than 11 percent, the ten-year Treasury bond yield climbed twelve basis points (moving inversely to the Treasury bond price), and the DXY trade-weighted dollar index fell 1.3 percent.

President Trump and Treasury Secretary Scott Bessent acknowledged that market volatility, especially in Treasury bonds, when the ninety-day pause for many tariffs was announced on April 9.

Normally in times of macroeconomic stress, the dollar and Treasury markets appreciate in value, as both domestic and foreign investors seek relative safety and liquidity. That investor reaction has even held when stress emanated from within the United States, such as the U.S. sovereign credit rating downgrade in August 2011 by Standard & Poor’s. (The dollar and Treasuries both gained in the subsequent weeks while the S&P 500 index fell.)

Further, most Wall Street analysts expected that higher tariffs would result in a stronger U.S. dollar as demand for imports would moderate, requiring less dollar selling in the process of buying the foreign goods.

Neither of those historic patterns repeated in April. Instead, markets resembled a brief period of capital flight from the United States, something confirmed in recently published Treasury Department data. The monthly Treasury figures, released with a two-month lag, showed that foreign investors sold $70 billion worth of U.S. equities and Treasury and Agency debt during April. (Foreign investors continued to be net purchasers of U.S. corporate debt that month, so the total net capital outflow was $51 billion.)

Although the abrupt trend change was noteworthy, the degree of U.S. asset selling was small relative to the purchases that took place earlier in 2025 as well as in recent years. For context, 2024 saw average monthly purchases of U.S. equities and bonds around $98 billion, a monthly net inflow nearly double the size of April’s outflow.

The steady foreign buying of U.S. assets over the past several years, alongside what had become a significant difference in valuations of the dollar and U.S. equities versus foreign counterparts, left U.S. markets particularly vulnerable to April’s crisis of confidence among foreign investors.

The tariff pause so far has stabilized U.S. bond markets and helped domestic equities not only recoup losses but also post further gains (helped in part by optimistic U.S. retail investors). The dollar, however, has continued to slip. That decline delivers a second lesson from the Liberation Day tariffs: changes in financial-asset holdings by large overseas investors can come in different forms and time frames.

In the case of the dollar, foreign investors who are now incorporating a relatively more policy-driven risk premium in U.S. assets can reduce their holdings, selling the dollar in the process. They can also, however, hold onto assets where they believe there is value but hedge out the currency exposure. This too can lead to a weaker currency.

For investors such as pension funds, making those allocation decisions can take months or quarters. Boards of directors or other stakeholders are informed of market analysis before any portfolio changes are implemented. That means the April moves could be just the first small step in a larger trend over the coming quarters. That more than 30 percent of foreign Treasury holdings mature in the next two years is also worth noting; investors could simply not replace those holdings rather than actively sell as a way to reduce their overall exposure.

A third lesson is that alternatives to U.S. assets need to be considered as dynamic, relative opportunities. As the dollar has fallen, for instance, gold prices have added to already sizable year-to-date gains (7.7 percent just since April 2 and 28 percent so far in 2025, according to Bloomberg data). Gold, unlike U.S. fixed-income instruments, offers no yield. However, investor positioning was relatively less stretched in gold and for some, at least, it is seen as a relatively more attractive safe-haven asset. Indeed, worries over the potential for tariffs to support inflation, along with greater Treasury supply to fund budget deficits while foreign demand is in doubt, have also fueled gold buying.  

Similarly, German gross domestic product (GDP) growth lags that of the United States. However, a relative improvement in economic sentiment following the German government’s decision to relax fiscal rules and spend more, alongside lower equity valuations, allowed the German stock market to gain 30.5 percent year-to-date (through June 20, 2025) in euro terms, versus a 1.5 percent gain for the S&P 500.

A final lesson from Liberation Day is to consider trade developments holistically. Global financial markets are interlinked and have significant implications for economic trends and policy decisions. Switzerland provides a timely example. Since April 2, the Swiss franc, often viewed as a safe-haven currency in part due to its largest current-account surplus, gained 8 percent against the broadly weakening dollar, undermining Swiss exports. Related concerns over broader growth and inflation led the Swiss National Bank to lower policy interest rates to zero at its June meeting, a decision that would have been much less likely without the passthrough from U.S. tariffs. CFR Senior Fellow Brad Setser has detailed a similarly striking currency response to U.S. trade policy in Taiwan.

In contrast, tariff-fueled inflation worries in the United States were part of the Federal Reserve’s thinking in June 2025 to hold policy interest rates steady, which contributed to sticky longer-term bond yields despite exogenous factors (such as the Israeli strikes on Iran) that normally would result in significant safe-haven bond buying. Higher U.S. yields exacerbate U.S. fiscal worries and marginally raise borrowing costs globally. 

Ninety days into “liberation,” it is unclear what the U.S. trade endgame will look like, or when observers will know it is at an end. What is clear, however, is that President Trump’s policy choices will continue to shape global investor decisions, not just in the moment, but also in the long term. Those decisions, in turn, will influence asset prices, with spillover both to the U.S. and the global economies.