Adds inflation analysis, consumer sentiment survey

By Joe Cash, Karin Strohecker and James Oliphant

BEIJING/WASHINGTON/LONDON, April 11 (Reuters) - Beijing increased its tariffs on U.S. imports to 125% on Friday, hitting back against U.S. President Donald Trump's decision to hike duties on Chinese goods and raising the stakes in a trade war that threatens to upend global supply chains.

U.S. markets churned as China's retaliation intensified global economic turmoil unleashed by Trump's tariffs. One U.S. survey of consumers showed inflation fears have mounted to their highest since 1981.

"Recession risk is much, much higher now than it was a couple weeks ago," said Adam Hetts, global head of multi-asset at Janus Henderson.

Foreign leaders have puzzled over how to respond to the biggest disruption to the world trade order in decades. Trump's administration stuck to its guns, touting discussions on a number of trade deals it says will justify its dramatic upheaval in policy.

"We are doing really well on our TARIFF POLICY. Very exciting for America, and the World!!! It is moving along quickly," Trump posted on social media on Friday.

The tit-for-tat tariff increases by the U.S. and China stand to make goods trade between the world's two largest economies impossible, analysts say. That commerce was worth more than $650 billion in 2024.

The dollar slid and a sell-off intensified in U.S. government bonds, the world's biggest bond market. Gold, a safe haven for investors in times of crisis, scaled a record high.

With the dollar weakening, selling of U.S. assets was perhaps most exemplified by the drop in prices of the U.S. 10-year Treasury note US10YT=RR, long considered among the world's safest investments.

The decline drove its yield - which moves opposite to the price and is critical for determining things like interest rates on mortgages - up to a two-month high. On the week, its yield has climbed more than half a percentage point, the largest weekly increase in more than four decades.

A second day of data on U.S. inflation showed price pressures were not yet building broadly across the U.S. economy, although the Producer Price Index for March did show industrial metals prices rising due to import levies on things like steel and aluminum, in place for a month now.

"Tarifflation will be much more important for the outlook than backward-looking data," said Bill Adams, chief economist at Comerica Bank. "If tariffs stay in place they will push inflation considerably higher in coming months."

The University of Michigan said its Consumer Sentiment Index dropped to 50.8 this month from a final reading of 57.0 in March. Economists polled by Reuters had forecast the index falling to 54.5.

In a reversal of previous surveys, the latest one also showed weakening confidence among Trump's fellow Republicans.

Consumers' 12-month inflation expectations soared to 6.7% this month, the highest reading since 1981, from 5.0% in March, according to the survey.

TRADE WAR WITH CHINA

Earlier this week, Trump announced a 90-day tariff pause on dozens of countries while ratcheting up tariffs on Chinese imports effectively to 145%.

China retaliated with new tariffs on Friday. China's finance ministry called Trump's tariffs "completely unilateral bullying and coercion."

Beijing indicated this would be the last time it matched U.S. tariff rises but left the door open for other types of retaliation.

"If the U.S. truly wants to have talks, it should stop its capricious and destructive behavior," Liu Pengyu, spokesperson for the Chinese Embassy in the U.S., wrote on social media. "China will never bow to maximum pressure of the U.S."

UBS analysts in a note called China's declaration "an acknowledgement that trade between the two countries has essentially been completely severed."

U.S. Trade Representative Jamieson Greer said he was not surprised by China's latest countermeasures, but they were "certainly unfortunate."

CHINA COURTS SPAIN AND EU

On Thursday, Trump told reporters he thought the U.S. could make a deal with China and he respected Chinese President Xi Jinping. On Friday, Xi made his first public remarks on Trump's tariffs, telling Spanish Prime Minister Pedro Sanchez in Beijing that China and the European Union should "jointly oppose unilateral acts of bullying."

China has signed two agricultural trade protocols with Spain covering pork and cherries as it looks to mend its strained relationship with the EU, the last open major market for its products.

TRADE TALKS

The Trump administration has shrugged off market turmoil, saying striking deals with other countries would bring certainty. Greer said that he will speak to Israeli and Taiwanese counterparts on Friday after holding a long discussion with the Vietnamese.

"I have a full dance card," Greer told Fox News.

Meanwhile, India and the U.S. have finalised terms of reference for talks over the first segment of a bilateral trade deal, an Indian trade official said.

Japanese Prime Minister Shigeru Ishiba has set up a trade task force that hopes to visit Washington next week.

Vietnam, hoping to avoid tariffs, is prepared to crack down on Chinese goods being shipped to the U.S. via its territory, Reuters exclusively reported.

All this has done little to soothe business leaders' worries about soaring costs, falling orders and snarled supply chains.

For European businesses in particular, a stronger euro automatically makes them less competitive in the global market.

The euro extended its rise on Friday, reaching its highest in over three years versus the dollar.

(Reporting by Reuters newsrooms; Writing by John Geddie, Ingrid Melander and James Oliphant; Editing by Lincoln Feast, Toby Chopra and Franklin Paul)

((John.Geddie@thomsonreuters.com; +81 80 7264 2833;))