Weekly global economic update

Week of December 8, 2025

• Some comments on the ‘safe haven’ role of the US dollar
• Potential global impact of Japanese monetary policy
• More signs of US job market weakness
• The fiscal impact of US tariffs
• Eurozone inflation accelerates slightly

Some comments on the ‘safe haven’ role of the US dollar

• In early April, there was a narrative from some economists and investors around a “capital flight” from the United States, following the US administration’s announcement of steep tariffs.  Immediately after the announcement, US bond yields increased while the value of the US dollar declined. Normally, a relative rise in US bond yields would have pushed up the value of the dollar.  Instead, there was investor concern about the sharp shift of US trade policy toward tariffs, the uncertainty about the future of the policy, and concerns about the trajectory of US fiscal policy.  Many investors became wary of holding assets denominated in US dollars and started to shift toward other assets such as the Japanese yen, the Swiss franc, and gold.

However, in the months that followed the April tariff announcement, investors returned to dollar-based assets, largely because of the attractiveness of US equities and expectations of further easing of US monetary policy. As a result, bond yields declined from their peak, while the value of the US dollar rebounded slightly. This mostly reflected enthusiasm regarding investment in artificial intelligence. Still, many foreign investors in US equities reportedly engaged in hedging strategies to manage currency risk.

On the other hand, a new report from the Bank for International Settlements (BIS)—the banker to the world’s central banks—suggests that the traditional safe-asset role of the US dollar has diminished compared to other favorable assets. The BIS noted that “historically, as safe-haven assets, US Treasuries tended to exhibit positive correlations with other safe assets—for example, bonds issued by highly rated sovereigns or gold—as well as with gauges of uncertainty and risk appetite such as the VIX [volatility index]. However, these correlations have approached zero since April, possibly indicating a weakening of US Treasuries’ safe-haven properties. By contrast, the prices in other core bond markets have not been subject to similar shifts.”

If this analysis is correct, it bodes poorly for the US government’s ability to issue large amounts of debt with impunity. Until now, investors tended to dismiss concerns about the burgeoning debt of the US government, confident that the safe-haven properties of US Treasuries would offset the impact of excessive debt. That might no longer be the case. Going forward, US bond yields could rise sharply if fiscal concerns intensify.

Still, use of the US dollar in international transactions is now higher than during the past quarter-century, accounting for almost half of all transactions. And despite the increased role of the Chinese renminbi, it still only accounts for 3.2% of all transactions. Thus, while investor preferences may be shifting, the US dollar’s central position in global transactions does not appear to be under threat.

Potential global impact of Japanese monetary policy

• As investors await a decision from the Bank of Japan (BOJ) to raise the benchmark interest rate, they are concerned that the yen-carry trade could shut down, thereby disrupting global financial markets.  The BOJ has already indicated a likelihood of raising the benchmark interest rate, given concerns about persistent inflation. Futures markets are now pricing a two-thirds probability that the BOJ will raise the rate at its next policy committee meeting later this month.

For a very long time, the benchmark interest rate was very low, even negative for a while. This fact encouraged investors to borrow cheaply in yen and purchase high-yielding assets in other currencies.  This was known as the yen-carry trade. It was very profitable, so long as the value of the yen did not rise sharply—and it didn’t.

Yet now, in anticipation of higher short-term rates, Japanese bond yields have risen sharply, offering investors better returns on yen-denominated assets. This, in turn, has contributed to higher bond yields in the United States and Germany as Japanese demand for foreign bonds has diminished. As such, a further tightening of Japanese monetary policy could have global implications.

Of particular concern would be emerging market (EM) assets. The yen-carry trade partly involved investors borrowing in yen to purchase EM assets. This, in turn, put downward pressure on EM bond yields. If the carry trade shuts down or diminishes, EM governments could face higher borrowing costs.

More signs of US job market weakness

• Because of the recent US government shutdown, the next official report on labor market conditions due in November will not be published until Dec. 16, 2025, after the Federal Reserve’s policy committee meets to set interest rates. Thus, Fed leadership will have to rely on other pieces of information to assess the state of the job market. One such piece is the estimate of private sector employment published by ADP, a payroll-processing company. The ADP report is often, but not always, a good predictor of official numbers.

Last week, ADP released its estimate for November. It said that the number of private sector jobs fell by 32,000 from October to November—the biggest decline since March 2023. Moreover, ADP estimates that private sector employment fell in four of the last six months. This report led investors to boost their expectations of a rate cut from the Fed this month. For futures markets, the implied probability of a rate cut in December increased from 88% on the day the data was published to 89% the day after. As such, the yield on the government’s two-year bond fell.

The chief economist at ADP commented that “Hiring has been choppy of late as employers weather cautious consumers and an uncertain macroeconomic environment. And while November’s slowdown was broad-based, it was led by a pullback among small businesses.” Indeed, numbers show that, in November, employment fell sharply for establishments with fewer than 50 employees. This was partly offset by strong growth in establishments with 50 or more employees.

Meanwhile, ADP estimated that employment fell sharply in manufacturing, information, and professional and business services. On the other hand, employment grew at a healthy pace in education and health services as well as in leisure and hospitality. This is similar to the pattern seen in the government’s jobs report for October.

Overall, this report is consistent with the view that the US job market has softened. Yet it is unclear if that is only due to weak demand. Rather, the shift in immigration policy has slowed labor force growth. Consequently, it is likely that the job growth slowdown partly reflects both weakening supply and demand in the labor market. Unless there is an offsetting acceleration in labor productivity, slower employment growth will result in slower economic growth.

The fiscal impact of US tariffs

• How much revenue has the US government collected since tariffs were substantially increased? And how does the revenue compare with the value of imports? These are important questions and, thankfully, we have answers from a Peterson Institute analysis.

First, the analysis says that the US government generated US$149 billion in tariff revenue from January through August of this year—a significant increase from the previous year when tariffs rates were very low. In the same period, the federal government’s budget deficit was US$1,865 billion.  This means that tariffs had only a modest impact on the budget deficit.

At a recent meeting in Paris on the sidelines of the OECD’s annual meeting, I heard the administration’s interim chairman of the Council of Economic Advisors, Pierre Yared, state that tariff revenue is reducing the budget deficit, thereby removing any concern about the fiscal effects of the One Big Beautiful Bill. Yet, if tariffs lead to a further reduction in imports, revenue will decline, reducing the fiscal impact. The administration has also suggested that tariffs can lead to reshoring of manufacturing, which implies a reduction in imports of manufactured goods. That, in turn, suggests a decline in tariff revenue.

Meanwhile, the Peterson Institute also states that tariff revenue is about 10.2% of the value of imported goods. This is lower than the 17% tariff rate estimated by the Yale Budget Lab. But the Peterson Institutes also accounts for exemptions, exclusions, delays, and other offsets. Still, this effective tariff rate is historically high. Moreover, it is having variable effects depending on the country from which imports arrive, and the types of products imported.

The report says that, in August, tariff revenue was 16% of the value of imported consumer goods.  The figure was 11.5% for industrial intermediate goods, 6.7% for capital goods, and 1.3% for raw materials. However, the report notes that, in August, most companies had not yet passed on most of the cost of tariffs to their customers. Thus, the impact on consumer prices was modest. In part, this is because companies are not marking up old inventory. However, it is likely that there will be greater passing through of costs in the months to come, thereby leading to higher inflation.

Also, the report found that the effective tariff rate in August was 37.1% for imports from China, 16.4% for Japan, 9.2% for the European Union, 4.7% for Mexico, and 3.7% for Canada. The very high tariff on Chinese imports is already leading to a substantial diversion of trade away from China.  The low rates for Mexico and Canada reflect the exemption for goods covered by the free trade agreement between the United States, Mexico, and Canada, which will be renegotiated in 2026.

Eurozone inflation accelerates slightly

• Inflation in the Eurozone accelerated slightly in November, although it remains low and close to the target of the European Central Bank (ECB). The European Union reports that, in November, consumer prices in the Eurozone were up 2.2% from a year earlier. This is up from 2.1% in October.  On the other hand, the European Union reports that prices fell 0.3% from October to November.

When volatile food and energy prices are excluded, core prices were up 2.4% in November from a year earlier. This was the same as in September and October. However, core prices fell 0.5% from October to November, suggesting that inflation is starting to weaken.

Most notable was the acceleration in services inflation. In November, the price of services was up 3.5% from a year earlier—the highest since April 2025. However, service prices were down 0.8% from October to November. Services inflation is important because services represent the largest share of consumer spending. Moreover, services tend to be labor-intensive and are sensitive to labor market conditions.

The fact that annual services inflation accelerated in November will likely be of concern to the European Central Bank (ECB). The ECB policy committee will meet on Dec. 18, 2025. ECB President Lagarde recently stated that the rates “we settled on at the last meetings are, in my view, set correctly.” Meanwhile, futures markets signaled a probability of 30% for a rate cut by June; in other words, investors believe that the ECB likely has no reason to ease policy further, especially if inflationary pressures remain.

By country, inflation in November was 2.6% in Germany, 0.8% in France, 1.1% in Italy, 3.1% in Spain, 2.6% in the Netherlands, and 2.6% in Belgium.