The first market reaction to the rate cut has been anything but benign.
Immediate Market Reaction: USD Devaluation
The first observable effect of the rate cut has been clearly negative through the currency channel.
The EUR/USD moved from 1.1690 to 1.1745 between
November 21 (11:22) and December 11 (01:46), marking a further
devaluation of the US dollar against the euro.
This USD weakness has implications that go far beyond foreign exchange markets. A weaker dollar:
- Reduces the effectiveness of import tariffs.
- Directly discourages foreign purchases of newly issued US debt.
This second point is critical. The European Union remains the largest foreign holder and buyer
of US Treasuries. A depreciating dollar erodes the real return for European investors,
reducing their incentive to absorb new US debt issuance.
Implications for Treasury Issuance and Long-Term Rates
In this context, both the Treasury and the Federal Reserve face a structural challenge.
If foreign demand weakens, long-duration yields must compensate.
Possible view that under these conditions:
- Yields on 5–10 year Notes will not decline easily.
- Yields on 15–30 year Bonds will remain sticky or elevated.
This yield resistance undermines one of the main objectives of rate cuts: lowering
domestic borrowing costs. Without a meaningful decline in longer-term yields:
- Mortgage rates remain elevated.
- Loan rates for consumers and businesses stay restrictive.
- Consumption and housing activity remain constrained.
If this scenario persists, the rate cut risks becoming economically ineffective,
delivering limited stimulus to the real economy and the equity market.
Trade Balance: A GDP-Relevant Signal
The trade balance data adds another important layer to this analysis and must be read carefully.
Year-to-Date Trade Balance (September)
- September 2025: -765.14B USD
- September 2024: -652.58B USD
- Change: +17.42% deterioration
Exports and Imports
- Exports September 2025: 2542.1B USD
- Exports September 2024: 2417.0B USD (+5.17%)
- Imports September 2025: 3307.2B USD
- Imports September 2024: 3069.6B USD (+7.74%)
Imports continue to grow faster than exports, worsening the trade deficit despite
respectable export performance.
Quarterly Dynamics and Tariff Front-Loading
The intra-year breakdown reveals a crucial distortion driven by tariff expectations.
- Balance YTD March 2025: -385.5B USD
- Balance YTD March 2024: -199.7B USD (+92.9%)
- Balance April–September 2025: -379.64B USD
- Balance April–September 2024: -452.81B USD (-16.52%)
The US system clearly concentrated imports in Q1 to preempt the
effects of new customs tariffs. This front-loading has distorted trade flows
and temporarily masked future pressures.
Three Key Considerations Going Forward
- Tariff Risk Perception:
Fear of the negative effects of higher customs duties on the US system remains strong.
At this stage, nothing conclusive can be said about the effectiveness of Trump’s trade policy.
The real economic effects will only become visible starting February 26. - Treasury Receipts vs. Deficit:
The only immediate positive impact of tariffs is higher customs-duty receipts
in the Treasury budget. Paradoxically, this will still contribute to a
larger Treasury deficit due to broader fiscal dynamics. - Inventories and Inflation:
Elevated inventories of imported goods continue to suppress inflationary pressure
in both PPI and CPI. This effect is temporary
and should not be confused with a structurally disinflationary trend.
A Bright Spot: Export Performance
One positive element stands out. US exports are up 5.17% year-to-date,
driven primarily by:
- Technology
- Biotechnology
This confirms that the competitive core of the US economy remains intact,
even as monetary, fiscal, and trade policies introduce new layers of risk.