This was one of the most topsy-turvy years in living memory for financial markets, as US President Donald Trump tore up the economic playbook that has shaped the multilateral, globalised world for decades. The president’s strategy may have been well telegraphed, but its impact on markets, growth and policymaking turned out to be very different from what most Wall Street analysts had expected. The global trade war of 2025 should not have come as a surprise.
Trump campaigned on making American manufacturing great again. “I love tariffs,” Trump said at a rally in Las Vegas two weeks before the election. “I can make anybody do anything through the use of tariffs.” Trump said he would force countries around the world to pay for “ripping off” the US with “unfair” trade practices — and he did just that on April 2, so-called Liberation Day.
Despite months of warning, analysts and investors were still caught flat-footed by the chaotic rollout of a host of sky-high tariffs. The S&P 500 lost nearly 15% in the three days after Liberation Day, only to recoup most of that in the next few days once Trump delayed some of the more extreme elements of his flagship policy. Yet even after Trump’s partial rollback, the trade landscape has been transformed.
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The effective US tariff rate on imports at the end of 2024 was about 2.5%. It is now nearly 17%, according to The Budget Lab at Yale, the highest since 1935. What is perhaps most surprising is how little most markets seem to care.
The S&P 500 was expected to end this year at 6,500 points, according to the consensus forecast in Reuters’ 2024 year-end poll. That implied a rise of about 9%. The index is on track to gain twice as much, making a push for 7,000 points.
Want to find the biggest forecasting flub of the year? Look no further than the dollar. The greenback plunged 12% against a basket of major currencies in the first six months of 2025, its worst start to a year since president Richard Nixon took the US off the gold standard and began the era of free-floating exchange rates more than half a century ago.
That wasn’t supposed to happen. Trump’s protectionist tariffs and onshoring were expected to be inflationary and thus liable to keep monetary policy relatively tight. That, in turn, would support foreign inflows into the US and strengthen the dollar, or so the consensus view held.
But the rally never materialised, in large part because many global investors balked at Trump’s controversial policy agenda and trimmed their dollar exposure. Foreign investors still wanted exposure to the US tech boom and AI revolution, so they piled into US equities, but in a break from the recent past they hedged the currency risk. As a result, this year featured a rare phenomenon: a Wall Street boom and a dollar slide.
The Chinese yuan — and, in many ways, China itself — was another major forecasting miss. Analysts’ consensus view early in the year was that Beijing would retaliate against Washington’s tariffs by depreciating the yuan to boost exports, especially given the deflationary pressures bearing down on China’s economy. But the yuan moved in the opposite direction, at least against the dollar. China’s currency is set to end this year at its strongest level against the greenback in 14 months, a whisker away from the all-important 7 yuan per dollar level.
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