The US threat to impose 100% tariffs on Chinese imports has intensified tensions. The US Dollar’s reaction has been subdued, with EUR/USD seeing a minor rise, indicating expectations of a potential agreement between the US and China. Escalation risk appears heightened due to China’s stringent regulations on rare earth exports, a key dispute point.

The Impact of US Government Measures

The US government is willing to implement measures detrimental to its economy, despite the severe impact on both China’s exports and US importers who bear tariff costs. Although AI growth masks the situation, tariff-related uncertainty poses more harm than the tariffs themselves. US trading partners have negotiated tariff avoidance deals, but the US government’s approach has damaged goodwill.

Negotiated agreements appear unreliable, risking US isolation and a potential decrease in the US dollar’s global reserve currency status as nations seek alternative trading partners. The actions of the US have not inspired confidence among international partners, potentially leading to shifts in global trade alliances. The FXStreet Insights Team compiles expert market observations, offering insights from various analysts.

With the threat of 100% tariffs now on the table, we must prepare for a significant spike in market volatility. The VIX index, a key measure of market fear, has already surged over 35% in the past week to trade around 24.5, its highest level since the banking jitters of 2024. This signals that options premiums are rising, making hedging strategies more expensive but also more necessary.

The US dollar’s reaction has been muted so far, but we see growing risks of it weakening. Implied volatility on major dollar pairs, particularly EUR/USD and USD/JPY, has climbed as traders price in the potential economic damage of such aggressive tariffs. This uncertainty is compounded by the latest US Treasury data from August 2025, which showed foreign central banks continuing their gradual diversification away from dollar assets.

A New Threat to Equity Markets

In the equity markets, the ongoing AI boom has masked weakness, but this new trade threat could change that. The SOX semiconductor index, which is highly exposed to Chinese supply chains, has already fallen 7% this month. We are seeing a sharp increase in the purchase of put options on tech-focused ETFs, with put-to-call ratios reaching levels not seen since the market correction in early 2024.

China’s control over rare earth elements is a critical factor that cannot be ignored. Beijing’s tighter regulations on these exports, a key issue in past disputes, represent a powerful point of leverage. We have already seen futures contracts for critical elements like neodymium jump by over 15%, creating new risks and opportunities in the commodity options space.

The broader risk is that these tactics are isolating the United States in the global economy. We remember how the trade conflicts of the late 2010s spurred the creation of new trade partnerships that bypassed America. Recent trade data from the third quarter of 2025 showed a 12% year-over-year increase in trade between the EU and ASEAN blocs, suggesting a structural shift that could erode the dollar’s dominance over the long term.

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