The writer is a senior fellow at the Brookings Institution and a former chief economist at the Institute of International Finance

The US election may be the start of a massive dollar rally, but markets have yet to realise this. In fact, without much clarity on what is coming, markets are currently doing a retread of price action after Donald Trump’s 2016 win. Expectations of looser fiscal policy are lifting growth expectations, boosting the stock market, while rising US interest rates vis-à-vis the rest of the world buoy the dollar.

But, if the President-elect follows through on tariffs, bigger changes are coming. In 2018, after the US put a tariff on half of everything it imported from China at a 25 per cent rate, the renminbi fell 10 per cent versus the dollar, in what was almost a one-for-one offset. As a result, dollar-denominated import prices into the US were little changed and tariffs did little to disrupt the low-inflation equilibrium before the Covid pandemic. The lesson from that episode is that markets trade tariffs like an adverse terms-of-trade shock: the currency of the country subject to tariffs falls to offset the hit to competitiveness.