A persistent weakening of the dollar is stoking fears that President Trump's erratic trade policy may have damaged the currency's haven status, with consequences for the U.S. economy.
Amid the tariffs whiplash, investors have taken the typical approach of getting rid of risk assets, sending stock markets in a tailspin. Usually, they would do that while rushing to buy dollars, long viewed as a refuge for turbulent times.
Not this time. The S&P 500 fell 7% between April 2, a.k.a. "Liberation Day," when Trump made the broadest tariffs proclamation thus far, and Wednesday. Meanwhile, the WSJ Dollar Index, which measures the greenback against a basket of currencies, fell 4% in the same period.
"A traditional correlation is changing pretty dramatically and very quickly," said Anders Persson, Chief Investment Officer at Nuveen. He said the move was "really quite powerful."
The unusual move could be explained by a variety of factors, such as leveraged investors ditching dollar-denominated assets to raise cash in order to cover losses elsewhere. But some analysts believe that something deeper is happening: Investors no longer see the dollar as their best shelter.
"It could reflect some loss of confidence of foreigners in the U.S. economy," said Idanna Appio, portfolio manager at First Eagle Investments.
Moves in the dollar are closely related to Treasury yields, which are also seen as a haven. Foreign investors seeking refuge on Treasurys sell their local currency to get dollars needed to buy the securities. Their actions boost both the dollar value and bond prices, sending yields lower. After April 2, however, yields moved higher as the dollar weakened. The 10-year benchmark rose to 4.5% on April 11 from 4.2% on April 2, and has since receded to 4.3%.
Another part of the puzzle is gold, which is rising as an alternative to U.S. assets. It rose 6% through Wednesday from April 2, according to FactSet. The yen, also seen as a haven, has strengthened, with the dollar shedding 5% of its value against the Japanese currency.
"Betting on continued USD strength against the yen has become increasingly risky," Rania Gule, senior market analyst at XS.com, wrote in a press release on Wednesday.
None of these alternatives are as easy to trade as the greenback and Treasurys, making it unlikely that they will take the place of U.S. assets so fast.
The search for havens other than the dollar and U.S. Treasurys has been going on even before last year's election. The most recent Treasury data available show that the top foreign holders of Treasurys, Japan and China, have reduced their holdings in the 12 months through February, although total foreign holdings have increased in the period.
But Trump's drastic shuffling of the U.S. role in global trade could be accelerating the trend. Eventually, it could make it harder for Washington to spend its way out of economic downturns as it did in the pandemic.
The federal government has spent $1.31 trillion more than it took in this fiscal year, which ends Sept. 30, according to Treasury data. The gap was 23% wider than in the same period a year earlier.
The government issues Treasurys to cover the gap. If investors around the world get less interested in buying them, yields would go higher, pushing borrowing costs up across the economy.
"It would make our life more challenging because we are running very large fiscal deficits," Appio said.
In other words, the fallout from Trump's trade policy "reduces the U.S. government's ability to continue to provide its liabilities as the world's core asset without pushing up yields," Freya Beamish, chief economist at TS Lombard, wrote on Wednesday.
"If the United States were to become a jurisdiction where risks are structurally higher going forwards, that would make us less attractive," Federal Reserve Chair Jerome Powell said on Wednesday when asked about the implications of lasting policy uncertainty. "We don't know that at this point, but I think that would be the effect."
Some observers are less gloomy. Economist Nouriel Roubini wrote on X that "over time equity capital will continue to flock from Europe and the whole rest of the world to the U.S. to finance the biggest capex boom in recent U.S. history as AI and other technologies/industries of the future will boom in the U.S."
