How tariff policy and trade tensions are feeding into inflation expectations and FX risk

Global trade tensions have reached a critical inflection point. With new tariff policies reshaping international commerce, businesses face unprecedented challenges in managing inflation expectations and foreign exchange volatility. The ripple effects extend far beyond simple price increases – they're fundamentally altering how companies approach cross-border operations, financial planning, and risk management.

The new tariff landscape: understanding the immediate impact

Recent policy shifts have created seismic changes in global markets. President Trump introduced a new baseline 10% US tariff on goods from all economies, which has led to fears of higher prices, weaker demand and potentially a global recession ¹. The scope extends even further, with new tariffs including a 20% tariff on China and 25% punitive tariffs on steel and aluminum ².

These aren't isolated measures. Previously delayed tariff policies will be enacted on April 2, including reciprocal tariffs, a 25% tariff on goods from Canada and Mexico, secondary tariffs aimed at isolating Venezuela, and a 25% tariff on automobiles ². The comprehensive nature of these policies signals a fundamental shift in global trade dynamics.

The market response has been swift and severe. The market response to the tariff announcements was a global sell-off and a capital flight to assets perceived as offering a haven ³. This immediate reaction underscores the deep uncertainty these policies have injected into global financial markets.

Inflation expectations: the domino effect begins

Tariffs directly lead to a rise in domestic inflation in the US by raising the cost of imported goods ⁴. This isn't theoretical – we're already seeing concrete impacts. JP Morgan has raised its US inflation forecast to 4.4% by year-end, more than double the Fed's target ⁵.

The psychological impact on businesses and consumers amplifies these direct effects. US consumer sentiment had already plunged to a nearly 2½-year low in March amid worries that tariffs would boost prices and undercut the economy, according to the University of Michigan Surveys of Consumers ¹. This sentiment shift creates a self-reinforcing cycle where inflation expectations drive actual inflation through changed spending and pricing behaviors.

Businesses are already adjusting their strategies. The paper documents that firms' uncertainty and overconfidence – low ex ante variances compared to ex post (squared) forecast errors – are relevant for how firms form their beliefs about inflation and their inflation forecasts accuracy ⁶. This uncertainty translates directly into pricing decisions and investment strategies.

Currency volatility: navigating the FX storm

Foreign exchange markets have become increasingly volatile as tariff policies reshape global capital flows. 2025 has marked a turning point for global stock markets, with U.S. stocks facing a dramatic decline and European markets surging ahead ². This divergence creates significant FX risk for businesses operating across borders.

The Euro provides a clear example of this volatility. EUR/USD trades in positive territory above 1.1000 on Wednesday ⁷. Yet the European Central Bank (ECB) expects the Eurozone growth to take a bigger hit from Trump tariffs than initially estimated. The impact could be in excess of 1 percentage points ⁷.

For businesses managing international operations, these currency swings create immediate challenges. The U.S. current account deficit grew by $228.2 billion in 2024, reaching $1.13 trillion ². This massive imbalance adds further pressure to currency markets and increases the complexity of FX risk management.

Sector-specific impacts: who's feeling the heat

Different sectors face varying degrees of exposure to tariff-induced inflation and FX risk. Financial technology companies provide a stark example. Shares in Affirm are down more than 21% since Trump launched his global trade war on April 2, while shares in Robinhood are down more than 17%. Shares in SoFi, which offers loans and banking services, are down nearly 20% ¹.

Technology companies face particular challenges. U.S. tech stocks have suffered significant sell-offs in the past three months, with Nvidia dropping 21.6% year-to-date, and other tech giants such as Apple, Microsoft, Google, and Amazon seeing declines ranging from 8% to 18% ². These companies often have complex global supply chains that amplify tariff impacts.

Manufacturing and trade-dependent businesses face direct cost pressures. Jonathan Pines, Lead Portfolio Manager, Asia ex-Japan, stated that the greatest impact of the tariffs will be on companies in high tariff countries exporting items to the US for which price rises can't be easily passed on ³. This creates a squeeze on margins that forces difficult decisions about pricing and market positioning.

Managing cross-border payments in turbulent times

The complexity of managing international payments has increased dramatically. International transfers are expected to increase five percent per year until 2027 ⁸. Yet businesses face new challenges in executing these transfers efficiently while managing currency risk.

Payment infrastructure is evolving to meet these challenges. 89 percent of the payments that flow through the Swift network arrive at the destination bank within an hour ⁸. Half of the payments that flow through the Swift network make it all the way to the beneficiary account in less than five minutes ⁸.

Despite these improvements, errors remain costly. According to data analytics company LexisNexis, up to 50 percent of payments that don't complete or are delayed are due to simple data entry problems such as incorrectly typing the bank name and address, or getting the account numbers, IBAN or Swift BIC codes wrong ⁸. In a volatile FX environment, these delays can result in significant financial losses.

Strategic responses: building resilience

Businesses are adapting their strategies to navigate this new reality. Funds have shifted towards defensive sectors like healthcare, non-cyclical consumer goods, and utilities ². This defensive positioning reflects broader uncertainty about economic prospects.

Automation and efficiency improvements have become critical. Handling accounts payable processes manually can result in slower processing times, high rates of human error, a lack of financial visibility, and increased costs/missed opportunities for cost saving ⁹. Companies are accelerating digital transformation initiatives to reduce costs and improve agility.

Diversification strategies are gaining prominence. During the first Trump administration, the most material increases in US tariffs were on China. This led to a significant reduction in the share of US imports directly sourced from China, but benefited some countries, notably Mexico and Vietnam, which saw their share of US imports increase ⁴. Businesses are learning from this experience and diversifying their supply chains proactively.

Central bank responses and monetary policy implications

Central banks face difficult choices in responding to tariff-induced inflation. The paper states that firms' uncertainty and overconfidence impact firms' beliefs about the credibility of monetary policy ⁶. This credibility challenge complicates policy responses.

Market expectations for monetary policy have shifted dramatically. Markets are pricing in five cuts over the next 12 months, with 50/50 odds of a cut at the next meeting in May ⁵. Yet central banks must balance growth concerns against inflation risks.

Emerging markets face particular challenges. In the case of a hawkish Fed, this might put pressure on some emerging market central banks to maintain higher interest rates domestically ⁴. Brazil has already been forced to start hiking rates in response to currency weakness and market concerns about its fiscal position ⁴.

Technology and innovation in risk management

Financial technology is evolving rapidly to address these challenges. 90 percent of central banks globally are currently working on developing a Central Bank Digital Currency, according to Jason Clinton, Head of Financial Institution Group Sales Europe at J.P. Morgan ⁸. These digital currencies could provide new tools for managing cross-border transactions and FX risk.

Real-time payment systems offer immediate benefits. Real-time payments (RTP) systems are expected to generate $173 billion in additional economic output by 2026, according to the Center for Economic and Business Research (CEBR) ⁸. These systems reduce settlement risk and improve cash flow management.

Automation reduces operational risks. Research by Ardent Partners shows that businesses spend an average of $10 per invoice when handling them manually ¹⁰. Automated systems not only reduce costs but also minimize errors that can be costly in volatile markets.

Looking ahead: preparing for continued uncertainty

The outlook remains challenging. Goldman Sachs joined other investment banks in raising the odds of a US recession due to fears that Trump's tariffs would roil the global economy ¹. This recession risk adds another layer of complexity to business planning.

Market volatility is likely to persist. Trevor Greetham warned that volatility is 'likely to remain high' ¹¹. Businesses must build resilience to weather continued turbulence.

Structural changes in the global economy are accelerating. Structural changes in the world economy, including populism and deglobalisation, have ushered in a regime in which periods of low stable inflation are interrupted by sudden price level shocks that central banks are unable to prevent and unwilling to reverse, according to Trevor Greetham ¹¹. These structural shifts require fundamental changes in how businesses approach international operations.

Practical strategies for businesses

Businesses need comprehensive approaches to manage these interconnected risks. Multi-currency capabilities have become essential. Airwallex offers multi-currency accounts to receive funds, high-speed international transfers, multi-currency company & employee cards ¹². These tools help businesses manage FX exposure more effectively.

Supply chain diversification reduces concentration risk. A significant portion of the U.S. trade deficit is generated by American companies operating overseas ². Companies are reassessing their global footprints to balance efficiency with resilience.

Financial planning must account for increased uncertainty. 75% of U.S. companies exceeded profit expectations in Q1, but market sentiment predicts a slowdown in profit growth for 2025 ². Scenario planning and stress testing have become critical components of financial management.

The role of financial services partners

Navigating this complex environment requires sophisticated financial tools and expertise. Companies need partners who understand both the technical aspects of cross-border payments and the strategic implications of currency risk management.

Speed and accuracy in international transfers matter more than ever. McLaren Racing modernizes cross-border payments with Airwallex ¹³. This partnership demonstrates how the right financial infrastructure can provide competitive advantages in volatile markets.

Comprehensive solutions address multiple pain points. RYSE transformed complex cross-border finances into streamlined, cost-saving, and efficient global operations with Airwallex ¹⁴. Integration and automation reduce both operational risk and costs.

Conclusion: navigating the new normal

Tariff policies and trade tensions have fundamentally altered the landscape for international business. The combination of inflation pressures, currency volatility, and economic uncertainty creates unprecedented challenges for companies operating across borders.

Success in this environment requires sophisticated risk management, operational efficiency, and strategic flexibility. Businesses must invest in technology, diversify their operations, and partner with financial services providers who can navigate complexity.

For companies looking to build resilience against tariff-induced inflation and FX volatility, Airwallex provides comprehensive solutions. With capabilities including multi-currency accounts, high-speed international transfers, and automated accounts payable management ¹⁵, Airwallex helps businesses manage the financial complexities of global operations. In an era of unprecedented trade tensions and currency volatility, having the right financial infrastructure isn't just an operational necessity – it's a strategic imperative for sustainable growth.

FAQ

How do tariff policies directly impact inflation expectations and currency volatility?

Tariff policies create immediate price pressures by increasing import costs, which businesses often pass on to consumers, driving inflation expectations higher. This uncertainty causes currency volatility as investors reassess economic stability and trade relationships. The baseline 10% tariff on all imports announced by President Trump, along with higher tariffs on specific countries, has already triggered global market sell-offs and capital flight to safer assets.

What are the main challenges businesses face with cross-border payments during trade tensions?

Businesses encounter increased foreign exchange volatility, higher transaction costs, and operational complexity when managing cross-border payments during trade tensions. With international transfers expected to increase 5% annually until 2027, companies must navigate currency fluctuations while maintaining cash flow. Modern payment systems now process 84% of global payments with direct routing or single intermediaries, but tariff-induced market uncertainty adds significant risk to international transactions.

How can companies protect themselves from currency risk in the current trade environment?

Companies can implement multi-currency accounts to reduce conversion costs and timing risks, use hedging instruments to lock in exchange rates, and diversify their supplier base across different currency zones. Automated accounts payable systems can help streamline international payments and reduce manual errors during volatile periods. Additionally, businesses should consider establishing local banking relationships in key markets to minimize cross-border transaction exposure.

Which industries are most vulnerable to tariff-induced inflation and FX volatility?

Manufacturing companies, particularly those exporting to the US from high-tariff countries, face the greatest impact when they cannot easily pass price increases to consumers. Fintech companies like Robinhood and Affirm have already seen significant share price decreases due to tariff concerns, as they rely heavily on consumer spending and investment capacity. Automotive importers face particular challenges with the announced 25% tariff on car imports into the US.

What role does payment processing automation play in managing tariff-related business risks?

Payment processing automation becomes crucial during periods of trade uncertainty by reducing manual errors, improving cash flow visibility, and enabling faster response to currency fluctuations. Automated payroll systems help multinational companies manage employee payments across different currencies more efficiently. With 89% of Swift network payments now arriving within an hour, automated systems can capitalize on favorable exchange rates and minimize exposure windows during volatile periods.

How are global markets responding to the current tariff policies and what does this mean for businesses?

Global markets have experienced dramatic shifts, with US stocks declining while European markets surge due to manufacturing revival in Germany, France, and the UK. This capital reallocation creates both challenges and opportunities for businesses operating internationally. Companies must adapt their financial strategies to account for changing market dynamics, potential recession risks, and the need for greater operational resilience in their cross-border operations.

Citations

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