TOKYO – The dollar extended its biggest plunge in three years on Friday after China raised tariffs on the US to 125% from 84%, a tit-for-tat step that has gold surging, markets everywhere gyrating and investors more uncertain than ever about the global economic and financial outlook.

It's now US President Donald Trump's move. Does the Trump 2.0 White House double down and increase its own tariff rate, now at 145%, on Asia's biggest economy? Trump, after all, has threatened before a 200% levy on certain Chinese products.

Perhaps most interesting about this week is what global investors learned about the Trump 2.0's pain threshold. Punters learned – to their horror – that Trump is willing to stomach epic stock market losses but not telltale signs of distress in the bond market.

Posterity will show that it wasn't the US Congress, the judiciary or voters that forced the US president into a more relational tariff policy. It was bond traders.

In Asian trading hours on April 9, the so-called "bond vigilantes" pushed the yield on 30-year US Treasury bonds above 5%, Bloomberg reported. That — and memories of events from the mid-1990s, mid-2000s and the Silicon Valley Bank bust in 2023 — saw Trump beat a hasty and rare retreat on most tariffs.

Yet it's concerns about the next round of vigilantes to take on the Trump White House that made him blink: Asian central banks.

Central banks in the region hold roughly US$3 trillion of US Treasuries, with Japan and China, the top holders, sitting on a combined $1.9 trillion. If they were to start selling on a significant scale, who could pick up the slack? Other than the largest global banks buying steadily, arguably no one.

That's why chatter in bond trading pits this week that Japan, China and other Asian monetary authorities might be selling so alarmed top US Treasury Department officials. For years, traders feared China might dump its trove of US T-bills in retaliation against US sanctions and restrictions. That day may have arrived.

China, after all, has an incentive to show that "it won't hesitate to cause turmoil in the global financial market in order to improve its negotiating power against the US," says strategist Ataru Okumura at SMBC Nikko Securities.

Reporting was that dire warnings from household name financiers like Jamie Dimon of JPMorgan Chase & Co broke through the Trumpian bubble.

The years Treasury Secretary Scott Bessent spent working in hedge fund circles came in handy. For all Trump's public bluster, another Long-Term Capital Management-like crash could have been catastrophic for global markets and the US economy.