Global Inflation Concerns, Trade Tensions Could Set Stage for Currency Adjustments

After reviewing the changing patterns of economic policies to deal with the denting impacts of Trump’s trade tariffs, I anticipate that this swift escalation of trade tensions and extremely high level of uncertainty are expected to have a significant impact on global economic activities which is constantly declining as the global growth is projected to drop to drop 2.8% in 2025 and 3% in 2026 – down 3.3% for both years in January 2025 WEO Update, corresponding to a cumulative down-grade of 0.8 percent point, and much below the historical (2000-19) average of 3.7 percent, according to IMF report, published in April 2025.

Undoubtedly, growth in advanced economies is projected to be 1.4% in 2025 while growth in the United State is expected to slow to 1.8%, a pace that is 0.9 percentage point lower to the projection in January 2025 WEO Update, on account of greater policy uncertainty, trade tension, and other demand momentum, whereas growth in euro area at 0.8 percent is expected to slow by 0.2 percentage point.

In emerging markets and developing economies, growth is expected to slow to 3.7 percent in 2025 and 3.9 percent in 2026, with significant downgrades for countries most affected by recent trade measures, such as China.

Global headline inflation is expected to decline at a pace slightly slower than initially anticipated in January, reaching 4.3 percent in 2025 and 3.6 percent in 2026, with notable upward revisions for advanced economies and slight downward revisions for emerging market and developing economies in 2025.

Intensifying downside risks dominate the outlook. Ratcheting up a trade war, along with even more elevated trade policy uncertainty, could further reduce near- and longer-term growth, while eroded policy buffers weaken resilience to future shocks.

Divergent and rapidly evolving economic policy stances or deteriorating sentiment could trigger additional repricing of assets beyond what took place after the announcement of sweeping U.S. tariffs on April 2 and sharp adjustments in foreign exchange rates and capital flow, especially for economies already facing debt distress.

Broader financial instability may ensue, including damage to the international monetary system. Demographic shifts and a shrinking foreign labor force may curb potential growth and threaten fiscal sustainability.

Undoubtedly, governments in advanced economies on average are expected to tighten fiscal policy in 2025-26 and to a lesser extent, in 2027. The general government structural-fiscal-balance-to-GDP ratio is expected to improve by 1 percentage point in the United States in 2025. Yet it is worth noting that under current policies, US public debt fails to stabilize, rising from 121 percent of GDP in 2024 to 130 percent of GDP in 2030.

In the euro area, the primary deficit in Germany is expected to widen by about 1 percent of GDP by 2030, relative to 2024 d by about 4 percent of GDP relative to the January WEO forecast for 2030, with an increase driven primarily by higher defense spending and public investment, and this is assumed to generate spillover to France, Italy, and Spain.

The euro area debt-to-GDP ratio is expected to increase from its current 88 percent to 93 percent in 2030, although there is significant uncertainty surrounding the assessment of the economic impact of the additional fiscal spending.

In emerging market and developing economies, primary fiscal deficits are projected to widen in 2025 by 0.3 percentage points on average, followed by fiscal tightening starting in 2026.

In China, the structural-fiscal-balance-to-GDP ratio is expected to deteriorate by 1.2 percentage points in 2025. Public debt in emerging market and developing economies, the primary fiscal deficit continues to rise from its current level of 70 percent of GDP, reaching a projected 83 percent in 2030.

I anticipate that the inflation outlook as a whole has improved but has not yet fully returned to pre-pandemic patterns, and it is subject to higher uncertainty. In particular, the effect of recently proposed tariffs on inflation across countries will depend on whether the tariffs are perceived to be temporary or permanent, the extent to which firms adjust margins to offset increased import costs, and whether importers are invoiced in US dollars or local currency.

Cross-country implications will differ, too. Trade tariffs act as a supply shock on tariffing countries, reducing productivity and increasing costs. Tariffed countries face a negative demand shock as export demand diminishes, exerting downward pressure on prices.

In both cases, trade uncertainty adds a layer of demand as businesses and households respond y postponing investment and spending, and this effect may be amplified by higher financial conditions and increased exchange rate volatility.

Amid such economically indecisive growth prospects, the Federal Reserve and the European Central Bank are expected to continue to reduce interest rates in the coming quarter, albeit at different paces from one another.

In the United States, the federal funds rate is projected to be down to 4 percent at the end of 2025 and reach its long-term equilibrium of 2.9 percent at the end of 2028.

In the eurozone area, 100 basis points in cuts are expected in 2025 (with three cuts having already occurred this year), representing more than 25 basis points of cuts than in the assumptions underlying the October 2024 WEO, bringing the policy rate to 2 percent by the middle of the year.

In Japan, policy rates are expected to be lifted at a similar pace as assumed in October 2024, gradually rising over the medium term towards a neutral setting of about 1.5 percent, consistent with keeping inflate and inflation expectations anchored at the Bank of Japan’s 2 percent target.

Governments in advanced economies, on average, are expected to tighten fiscal policy in 2025-26 and, to a lesser extent, in 2027. The general government structural-fiscal-balance-to-GDP ratio is expected to improve by 1 percentage point in the United States in 2025. Yet it is worth noting that under current policies. US public debt fails to stabilize, rising from 121 percent of GDP in 2024 to 130 percent of GDP in 2030.

I anticipate that the efforts made by the global central banks to make their economy shock-proof still look insufficient, as the panic buying spree, seen in the yellow metal by most of the central banks, has weakened their respective currencies.

Now, the question is whether their assumption of adding more and more gold in their reserve at such a higher price will be competent enough to control surging inflation when the impact of Trump’s trade tariffs will be clearly visible.

Undoubtedly, non-yielding bullion, often considered a safe-haven asset during periods of economic and geopolitical uncertainty, is known to perform well in low-interest-rate environments, but the efforts to keep the interest rate lower for a longer period will not extend their fiscal deficit in the coming years.

I anticipate that amid such policy shifts to deal with upcoming economic challenges, it looks quite challenging as the markets rely upon the expected interest rate cuts this year by the Federal Reserve and the central banks of some other countries, including Europe, while the central bank of Japan is on the way to lift interest rates at the same pace.

Undoubtedly, this situation could generate extreme indecisiveness in the financial markets which are about to met with financial jolts of Trump’s trade policies in coming months, while the currency exchange volatility could widen the gap between the US dollar to different currency, depending upon the dollar dependence of the Asia, Europe, Russia while China looks confident to completely de-dollarization to lessen its dependence on US dollar.

Moreover, the introduction of the petroyuan by China to buy oil from Saudi Arabia and other Middle East countries has added one more leg to its efforts to control inflation.

I find that at this crucial point, it is necessary to map the impact of such efforts to control inflationary pressure due to uneven price increases of imports and exports, by a comparative chart analysis of some currency pairs since 2020, along with global economic growth, and gold futures during this period up to September 2025.

Undoubtedly, after the first expected rate cut by the Federal Reserve in its September meeting, how the other central banks behave in regard to rate cuts or whether they choose some different option to boost the economic growth, as POBC was busy with massive buying in gold between 2024 and 2025, and the Central Bank of Japan is likely to hike interest rates ahead.

Finally, I conclude that the different currencies pair with US dollar, showing the impact of surging fear of declining growth just before the US Federal Reserve Meeting on September 16-17, 2025 to decide the quantum of interest rate cuts in September 2025, and expected cuts in 2026 to provide some relief to the markets but I find that this will also impact the movements of the major currency pairs amid surging expectations from the respective central banks in near future.

Undoubtedly, most of the currencies pairs are showing weakness in the monthly charts while the US dollar monthly chart shows a steep decline since February 2025 when it tested a high at 109.752 point.

On the other hand, gold futures, after testing a high at $3715, have tested a new high, and are constantly facing stiff resistance at $3677, after a rally, started in October 2023 amid massive buying by the global central banks.

Now, it will be interesting to see how these currency pairs take a directional move after the interest rate cut by the US Federal Reserve, and how the different central banks shift their policies to curb the denting impact of Trump’s trade tariff.

Disclaimer: Readers are expected to take any position in the currencies pairs and gold at their own risk, as this analysis is only based on observations.