Tariff as Financial Event II: the Geo-economics Fracture Hypothesis

What is unfolding is not just a liquidity event but possibly a more structural shift in the international financial architecture.

The charts above track high-frequency financial market developments—at 10-minute intervals over the past ten days—following President Trump’s April 2nd announcement of a new U.S. tariff regime. This analysis focuses on four key indicators: the U.S. dollar index, 10-year Treasury yields (a classic flight-to-safety benchmark), gold prices, and the USD/CHF exchange rate.

I want to focus on the high-frequency dynamic since April 9th, which marks the moratorium announcement (which excluded China): Gold prices have surged, the Swiss franc has appreciated markedly, and upward pressure on long-term U.S. yields has intensified. These market moves might suggest that a structural shift in the global financial architecture may unfold.

In this blog, I explore that possibility across four dimensions:

1. The 2020 Dash for Cash
   I revisit the March 2020 liquidity crisis—its market dynamics, policy response, and the behavior of key safe-haven assets like the dollar, gold, and the Swiss franc. This serves as a benchmark to contrast with the current episode.

2. April 2025: From Trade Shock to Financial Realignment
   I argue that the April 9th exception for China in the tariff moratorium may represent the onset of a geoeconomic fracture, signaling not just a trade policy shift but a deeper challenge to the global financial architecture.

3. Why This Is Not an Emerging Market Crisis
   Although some market behaviors resemble capital flight episodes typical of emerging markets, I explain why the U.S.—as issuer of the world’s reserve currency—remains structurally distinct. The issue here is not solvency.

4. Policy Response and Challenges to the Dollar Exit Thesis
   I close by briefly outlining why standard liquidity tools may not be enough this time. A more structural response may be needed. I also acknowledge the critical counterpoint: while the dollar system is under stress, there is still no obvious alternative—and that, paradoxically, reinforces both its resilience and its fragility.

Related blogs:

The Apprentice deepens the crisis by Vítor Constâncio: This is a very insightful post that touches on related topics. The U.S.-China Decoupling, the Dash for Cash in 2020, and expand more on policy implications. Great reading!

Trump’s end game is debt monetization by Pierpaolo Benigno: Key insight on currency depreciation as a macro adjustment mechanism to reverse a trade deficit position.

Tariffs as a Financial Event (previous related post).

Background

The past week has been turbulent for financial markets, following President Trump’s April 2nd, 2025 announcement of the new U.S. tariff regime. The immediate reaction was confusion and volatility, as markets repriced growth and risk in an environment that suddenly looked very different. In the previous blog, I framed the tariff shock as a financial event that activated a potential situation of financial stress (see Tariff as a Financial Event, 8th of April). In this note, I would like to discuss tariffs as a financial event but from a structural point of view.

A useful comparison is the “dash for cash” episode in March 2020—a classic liquidity crisis that was ultimately resolved by decisive intervention from the Federal Reserve. What we’re seeing now shares some of those features: a sharp, sudden need for liquidity, margin stress, and asset repricing. But there’s a critical difference. This time, the underlying driver isn’t a health shock—it’s a deliberate, structural policy move. The tariff shock is not just another market disruption; it may be the catalyst for a deeper geoeconomics and financial realignment.

The trigger in terms of interpreting this as a structural financial shift is the announcement of the temporary tariff moratorium on April 9th. This was interpreted as a temporary policy put in place to stabilize market sentiment but also, given the exception of China from the moratorium, could be seen as an indication of a fracture in terms of international trade relationship: a decoupling of the US from China. This is what I refer to as a geoeconomics fracture.

Let’s start by revisiting the March 2020 episode—and then contrast it with the current dynamics of this tariff-induced liquidity strain.

The Dash for Cash – March 2020

In March 2020, as the COVID-19 pandemic spread rapidly, global investors rushed to secure U.S. dollar liquidity. What began as a flight to safety quickly escalated into a full-blown liquidity crisis—even in the world’s most liquid market: U.S. Treasuries.

As we can see from the previous graph, between February 26 and March 9, 10-year Treasury yields fell sharply, dropping nearly 80 basis points from 1.34% to a record low of 0.55%. This reflected panic-driven demand for safe assets. However, by March 6, cracks were beginning to show: Treasury bid-ask spreads widened, pointing to impaired market functioning.

What followed was a sharp and unusual reversal. Between March 9 and March 18, the 10-year yield rebounded to 1.20%, even as economic conditions worsened. Liquidity deteriorated further—bid-ask spreads spiked, and price and volatility surged. Dislocations emerged between Treasury futures and the underlying cash market, breaking down standard arbitrage relationships.

Similar to what has happened in the first part of last week, a key driver of this dysfunction was the unwind of leveraged basis trades (see, for example, Leverage and margin spirals in fixed income markets during the Covid-19 crisis, BIS bulletin). This triggered a margin spiral: increased volatility pushed margin requirements higher, forcing sales that further depressed liquidity and prices.

Simultaneously, foreign official holders—including central banks—sold Treasuries at scale to raise U.S. dollars. Dealers, constrained by balance sheet limits and risk controls, were unable to fully absorb these flows, further straining the market.

By mid-March, the breakdown in the Treasury market functioning threatened to spill over into broader financial instability.

The Policy Response

The Federal Reserve responded very rapidly. On March 17, the Primary Dealer Credit Facility to supply funding directly to dealers—key market makers for Treasuries and other securities – was reintroduced. On March 23, the Fed removed size limits from its asset purchases, pledging to buy Treasuries and agency MBS “in the amounts needed” to restore market functioning (effectively QE-infinity).

Later on (31st of March 2020), it also launched the FIMA repo facility, allowing foreign central banks to access dollar liquidity without having to sell Treasuries on the open market—directly addressing one of the sources of pressure.

This episode was a classic liquidity crisis. The system was short of dollars. The Fed’s decisive intervention restored calm and helped re-anchor Treasury markets, reaffirming its role as a global lender of last resort.

The key point illustrated in the chart is that during the 2020 “dash for dollar cash,” the U.S. dollar appreciated—both in terms of the broad dollar index and against the Swiss franc, typically seen as another safe haven. At the same time, gold prices fell in dollar terms, underscoring the intensity of the liquidity scramble: even traditional hedges were sold to raise dollars.

April 2025: What is going on now?

President Trump’s April 2 tariff announcement triggered a swift reaction across global asset markets—most notably in Treasury bonds.

By Tuesday, the 7th of April, signs of stress had emerged. By Wednesday, the safe-haven bid in Treasuries had reversed sharply. The dynamics felt familiar:

• Basis trades around Treasuries broke down as arbitrage failed.

• Volatility spiked, and leveraged funds appeared to face forced liquidations.

• Treasury market functioning deteriorated—much like in March 2020.

In the first part of last week, the 2025 episode looked like a replay of the COVID-era “dash for cash”: a sudden liquidity squeeze, margin spirals, and Treasury dislocations.

It is possible that this market move forced a partial reversal of the tariff policy on April 9th. That day, the White House announced a temporary moratorium on tariffs for all countries—except China. While markets initially welcomed this as a stabilizing move, here I argue that another way to interpret it, is as a signal of a permanent fracture in the global trade order, effectively formalizing decoupling from China.

This marked a potential regime shift—from a liquidity event to something more structural and geopolitical.

A Strategic Reallocation Away from the Dollar

The market response has been telling. Unlike March 2020, this is not a scramble for dollars. Instead, signs point to a strategic rotation out of U.S. dollar assets:

• Gold and the Swiss franc have rallied, while the dollar has sold off sharply—despite the usual risk-off environment. The rally in Gold and the Swiss franc is particularly noticeable and very different from the market dynamic observed during the March 2020 episode.

• Foreign holders—possibly led by the PBOC (the People Bank of China)—appear to be selling Treasuries not just to raise liquidity but to diversify reserves into non-dollar assets and/or, in the case of the PBOC, to manage the pressure on the Yuan.

There is possibly another element on top of funding pressure that might be at play. It looks like the early stages of de-dollarization—a calculated response to geopolitical realignment. Some may see it as a stealth challenge to the dollar’s reserve status, exploiting U.S. policy volatility.

The symptoms are visible in the charts: collapsing Treasury liquidity, soaring gold, rising CHF, and a weakening USD. But behind the symptoms, there is something more fundamental: a fracture in the global financial architecture.

Why This Isn’t Just an Emerging Market-Style Crisis of a Fiscal Crisis

It is tempting to frame the current dynamics as resembling an emerging market (EM) capital flight—a currency under pressure, foreign outflows, and assets rotating into safe havens.

But, in my opinion, this analogy doesn’t hold for key fundamental reasons that characterize the U.S. economy and allow for policy options/responses that are not possible in general for emerging markets.

The U.S. is still the issuer of the world’s reserve currency.

• The U.S. doesn’t borrow in foreign currency the way EMs do.

• It prints the currency that is still needed in the current version of the international monetary system. That’s the privilege of issuing the unit of account for global trade, commodities, and reserves.

• Treasuries are not just an asset—they are collateral, reserves, and a benchmark for pricing global risk.

So this high-frequency market movement in which Treasuries are sold and the dollar is depreciating could indicate a geoeconomics financial reallocation rather than an EM-Style event.

Moreover, my reading is that price signals should not be interpreted as symptoms of default or fiscal stress.

• U.S. fundamentals haven’t changed drastically since March.

• This is not about creditworthiness or a sudden fiscal blowout.

• It’s about a change in trust in the system—the rules of the game, the neutrality of the dollar, the long-term intentions of U.S. policy.

EM-style crises are about the inability to repay. This is about a willingness to shift away from the dollar as the financial world’s anchor.

What this might be: Geopolitical Reallocation with Market Implications

What we’re witnessing could be a strategic portfolio realignment—a slow-moving structural shift in global capital flows driven by geopolitical logic, not financial stress.

• Reserve managers are reallocating out of dollar assets.

• The driving force isn’t solvency—it’s sovereignty.

• The triggers are not rate hikes or inflation surprises but tariffs, sanctions, investment restrictions, and fundamentally, a geopolitical decoupling.

If this fracture in the global order proves to be permanent, then the implications are far-reaching and structural. Unlike the rapid sell-offs of classic crises, this shift may unfold gradually—but with far more long-lasting implications.

This is the financial counterpart to a permanent trade shock—a structural break in the foundations of the international financial architecture. Over time, we may see foreign demand for Treasuries fall, term premia rise, and traditional correlations break down—for example, Treasuries may stop rallying during market stress.

A Challenge to Monetary Hegemony

This is not an EM-style crisis nor a typical liquidity squeeze. It’s a possible recalibration of the global financial system—happening in real time.

At the center of that system sits the United States, whose monetary hegemony may now be facing its first true challenge in decades. The key question is, when there is a challenge to the hegemony, what is the alternative?

The current market dynamic is rewarding gold, the Swiss franc, and the Euro, but it is not obvious that these asset classes could develop as a structural challenge to the US monetary hegemony.

Policy: Not Just a Liquidity Response

Here, I want to briefly discuss policy responses to this shift. I might dedicate a post to this topic. In 2020, the Fed’s toolkit—swap lines, QE, repo operations—was enough. That was a crisis of liquidity within a system still broadly trusted. But 2025 is different. It raises harder questions: What happens when the dollar itself is no longer viewed as a neutral reserve asset? How should policy respond when Treasury bonds, long treated as the backbone of the global system, are being systematically unwound by foreign reserve managers?

This might require a more structural policy response both by the Federal Reserve and regulators to absorb the shift.

Conclusion: From Crisis to Fracture?

2020 was a monetary event—a liquidity panic within a functioning global dollar system. 2025, in contrast, may be the start of a monetary-geopolitical fracture: the dollar system might be strategically exited, not just strained.

Of course, one can challenge this narrative. After all, if not the dollar—then what? The euro lacks fiscal unity. The renminbi remains capital-controlled. Gold has no yield and no central issuer. And while alternatives like the Swiss franc or even certain commodities may absorb flows at the margin, there is no fully credible substitute for the dollar system yet.

That is both the strength of the dollar and its vulnerability. The absence of a viable alternative may delay a broader shift, but it does not eliminate the risk. In fact, it raises the possibility of an equilibrium in which the dollar remains dominant but fragmented, with persistent pressure on U.S. real rates and a growing premium demanded by global investors.