US trade policy and the US dollar

We show that the US dollar response to trade policy uncertainty (TPU) is key to assessing the impact of US trade policy. Employing structural vector autoregressive models, we find that TPU shocks supported a multilateral USD appreciation during the 2018-19 trade tensions between the US and some of its major trading partners. We rationalize this in a two-country New Keynesian model with financial frictions that links the increase in TPU to rising demand for safe USD assets. Our findings suggest that the TPU-induced appreciation of the USD in 2018-19 significantly counteracted US trade policy attempts to raise US competitiveness.