Each new year, global investors face a wildcard that they must game out in real time. In 2025, punters confront three as the Donald Trump 2.0 presidency hits the ground running.
They are: the trajectory of the US dollar; Xi Jinping’s plans for the yuan; and how trade tensions might play out in the end.
Making matters worse, each relies in part on three additional imponderables: Trump’s penchant for policy chaos; how China might respond; and the ways in which Washington might retaliate against Beijing’s retaliation — and vice versa.
“As we step into 2025, the global economy stands at a precarious crossroads, heavily shaped by an overarching theme: uncertainty,” says Marcello Estevao, chief economist at the Institute of International Finance.
Estevao adds that “from political decisions to policy implementations, the lack of clarity emanates largely from the new Trump administration. This uncertainty extends far beyond the United States, permeating global markets, trade relations and regulatory frameworks.”
The first wildcard took on new urgency this week when Federal Reserve Chairman Jerome Powell’s board effectively defied the president. Trump told the audience in Davos earlier this month that he would “demand that interest rates drop immediately.”
In the weeks before the Fed’s January 29 decision to stand pat, Trump let it be known that lower rates are a key second-term priority. Team Powell ignored the jawboning, sparking an immediate retort. Trump even accused Powell’s team of letting diversity, equity and inclusion (DEI) considerations get in the way.
As Trump wrote on social media: “If the Fed had spent less time on DEI, gender ideology, ‘green’ energy and fake climate change, inflation would never have been a problem.”
Trump complained that “because Jay Powell and the Fed failed to stop the problem they created with inflation, I will do it by unleashing American energy production, slashing regulation, rebalancing international trade and reigniting American manufacturing.”
Traders know better than to dismiss Trump’s rantings. In his first term from 2017 to 2021, Trump went after his hand-picked Fed chairman early and often. It worked; Trump cajoled Powell into reversing the Fed’s tightening cycle and cutting rates in 2019.
Since then, Trump has made a point of slamming the Fed at every opportunity. On the campaign trail last October, Trump mocked Powell’s Fed. “I think it’s the greatest job in government,” Trump told Bloomberg. “You show up to the office once a month and you say, ‘let’s say flip a coin’ and everybody talks about you like you’re a god.”
Trump also argues that presidents should have a direct say in monetary decisions. “The Federal Reserve is a very interesting thing and it’s sort of gotten it wrong a lot,” Trump told an audience last year.
He added that, “I feel the president should have at least stayed there, yeah. I feel that strongly. I think that, in my case, I made a lot of money. I was very successful. And I think I have a better instinct than, in many cases, people that would be on the Federal Reserve or the chairman.”
Commandeering Fed policy decisions may be a way to weaken the dollar. Trump and his advisors make it clear the Fed’s independence is on the line. The “Project 2025” scheme that Republican operatives cooked up for Trump 2.0 includes curbing the Fed’s autonomy.
Part of the rationale for lower rates, many economists reckon, is so that Trump can more easily finance his fiscal plans. These include making permanent the US$1.7 trillion tax cut Trump signed in his first term and additional cuts his Republican Party is mulling.
With the national debt already topping $36 trillion, Trump’s administration will need to hold rates as low as possible. Yet the tension brewing between Trump and the Fed could become dollar-negative in a hurry.
The yuan wildcard could be quite Trump-dependent, too. For now, Xi’s government is resisting the temptation to weaken the yuan for export advantage. Traders have a different view of China’s trajectory, betting on a sharply lower exchange rate.
In recent weeks, the gap between 10-year sovereign Chinese debt yields and comparable US securities reached an unprecedented 300 basis points. That’s despite a barrage of stimulus efforts from Team Xi. It suggests investors think China’s worst run of deflation since the late 1990s amid the 1997-98 Asian financial crisis is here to stay.
It suggests, too, that traders think a Chinese devaluation could soon rock world markets.
The People’s Bank of China has been holding the line on the yuan for myriad reasons. One is to preserve the progress Beijing has made deleveraging the financial system in recent years. PBOC Governor Pan Gongsheng may worry that cutting rates might incentivize bad lending and borrowing decisions.
Another: a weaker yuan might trigger default among property developers as they find it harder to make payments on offshore debt. Already, global investors are keeping close tabs on liquidity problems at China Vanke.
Putting yuan internationalization in jeopardy is another concern. For nearly a decade now, Xi’s government has been working to increase the yuan’s use in trade and finance.
Beijing stepped up cooperation with the BRICS — Brazil, Russia, India, China, South Africa — and Global South nations to pivot away from the dollar-centric world order.
Reverting back to the beggar-thy-neighbor policies of the past might alarm international funds. And tarnished the yuan’s chances of securing reserve-currency status.
A weaker yuan might have Japan, South Korea and other top Asian economies believing they have a green light to meddle with exchange rates. That might precipitate a chaotic race to the bottom in currency markets. That would not go unnoticed by the Trump White House, which threatens the biggest trade war in world history.
The Trump factor feeds into wildcard No 3: where trade tensions might leave the global economy by the end of 2025.
This is arguably the least predictable policy outlook. Trump, after all, continues to change his mind about the direction of US tariffs. One day, they’re coming. The next day, Trump is stating that he hopes taxes on Chinese goods won’t be necessary.
“For the sake of business certainty and visibility, particularly for small businesses, figure out what you’re doing with tariffs as quickly as possible,” Peter Boockvar, chief investment officer at Bleakley Financial Group. “Right now, it’s just a giant global cloud overhead that has businesses around the world on edge.”
The US economy, says Desmond Lachman, senior fellow at the American Enterprise Institute, “is not an economic island, and serious economic problems abroad could come back to harm our financial system, our export sector and adversely impact our companies’ earnings.”
According to US media reports, the billionaire brigade surrounding Trump’s second administration is lobbying Trump not to start a tariff arms race with Beijing. Aside from being inflationary for the US, the fallout for global growth could devastate the bottom lines of companies from Amazon to Apple to Tesla.
Economist Paul Ashworth at Capital Economics says that “imposing any of these suggested tariffs would generate a rebound in consumer price inflation this year, taking it further above target and making it harder for the Fed to resume loosening monetary policy.”
IIF’s Estevao adds that “the complex interplay of these factors has already begun to reshape expectations for growth, inflation, and investment. The early days of the Trump administration’s second term have been marked by a flurry of executive orders and policy signals that underscore its intent to recalibrate US trade and immigration policies. While no new tariffs have been implemented yet, the administration has indicated plans to target key sectors, including European automobiles and Asian electronics.”
So far, Trump is keeping markets guessing on China tariffs. Though Canada and Mexico could be hit with 25% levies on February 1, China appears to be getting a reprieve. Question is, can it last? This has many policymakers, investors and corporate CEOs hopeful that Trump is prioritizing a giant US-China trade deal over tariffs.
The hope, as ING Bank chief China economist Lynn Song puts it, is that Trump’s trade war threats are merely “a bargaining chip” to achieve his China policy goals — from market access to limiting the flow of fentanyl to striking a deal for a TikTok sale.
Team Trump also may realize that today’s China is markedly less reliant on the US economy than in 2017, when Trump’s first term began, notes economist Louis Gave at Gavekal Dragonomics. China, Gave argues, “is probably more productive than any economy has ever been.”
China’s innovative game, meanwhile, is on display with the sudden emergence of DeepSeek as an artificial intelligence game changer. Nvidia’s shares alone lost $600 billion, the biggest deluge of red ink in corporate history.
The broader stock plunge has investors wondering how to play the rest of 2025. Vivek Arya, an analyst at Bank of America, says many clients “view the recent selloff as an enhanced buy opportunity” for Nvidia shares.
Others sense that this “Sputnik moment” in AI speaks to China’s huge investments in semiconductors, electric vehicles, renewable energy, robotics, biotechnology, aviation, high-speed rail and other sectors finally gaining traction in ways the Trump 2.0 gang might not realize.
Yet markets across asset classes will be captive to how this trifecta of risks unfolds this year. And how extreme uncertainty involving the dollar, yuan and Trumpian assaults on the global trading system shake out.
Follow William Pesek on X at @WilliamPesek
