Investors dodge U.S. dollar and Treasuries, scared by Trump's trade war

Washington Post

15-04-2025

The U.S. dollar is an early casualty of President Donald Trump's us-against-the-world trade war.
The dollar has lost almost 10 percent of its value since Inauguration Day with about half of that decline coming this month, after the president's decision to lift taxes on imported goods to their highest level since 1909.
The weaker dollar — now near a three-year low against the euro — is bad news for Americans traveling abroad and could also aggravate inflation by making foreign goods more expensive. U.S. exporters, however, should gain.
The drop is especially striking because countries that impose tariffs usually see their currency rise. But the wobbly rollout of Trump's tariff plans — with the president and his aides contradicting themselves about key details — left investors doubting the administration's competence.
'The administration's approach to policy and its lack of transparency in terms of motivations have all led to a distinct sense of unease in financial markets,' said David Page, head of macro research for Axa Investment Managers in London, which manages $1 trillion in investments. 'It doesn't look like what we have been used to in terms of well-thought-out policy.'
Those concerns last week sent investors fleeing from the dollar and U.S. government securities, historically a haven during financial crises.
In the hours before Trump's latest tariffs took effect April 9, long-term government securities behaved abnormally.
Investors typically rush to buy ultrasafe treasuries during a crisis, pushing their prices up and yields (which move opposite bond prices) down. Instead, at one point on Friday, the rate on the 30-year bond approached 5 percent, up from 4.4 percent one week earlier.
At the same time, the dollar also dropped, confounding traditional patterns and triggering talk of a historic break by observers including Lawrence Summers, a former treasury secretary.
On Monday, after markets quieted, Treasury Secretary Scott Bessent dismissed those concerns. In an interview with Bloomberg Television, he said there was 'no evidence' that foreign investors were abandoning U.S. assets, saying they had been active participants in recent auctions of government debt.
Long-term yields on Monday eased, but remained elevated. Those higher U.S. rates could linger as they have in the United Kingdom after a bond market revolt in 2022 over the Conservative government's plan to borrow heavily to pay for tax cuts.
Higher yields would raise borrowing costs across the economy. Consumers would pay more for car loans and mortgages while businesses would find it tougher to secure loans to expand and hire. The federal government, meanwhile, would likely see its annual interest bill soar past $1 trillion.
'From 2022 onwards, it's been harder for U.K. citizens, businesses or households to get cheaper borrowing rates. That's definitely a risk [in the U.S.] given the uncertainty that we've seen over the last couple of weeks,' Page said.
The dollar retreat reflected in the bond market's gyrations is unlikely to threaten the greenback's status as the dominant global currency. Central banks hold almost $7 trillion worth of dollars in reserve, almost three times as much as the No. 2 reserve currency, euros.
The dollar also remains the most widely used currency in global payments. In March, financial institutions used dollars for almost 49 percent of cross-border transactions, close to a 12-year high, according to the Society for Worldwide Interbank Financial Telecommunication.
'The dollar is incredibly entrenched in the global financial system in ways that no other currency is. Importing, exporting, borrowing, hedging, using the dollar for collateral, all of these things that major actors in the international economic system use the dollar for, would be so difficult to modify,' said Paul Blustein, author of 'King Dollar: The Past and Future of the World's Dominant Currency.'
Foreign investors spent recent years moving into U.S. stocks and bonds, seeking to capitalize on the fastest economic growth in the developed world.
But with U.S. assets trading at high prices, many investors have been overdue to rebalance their portfolios. The United States at the beginning of 2025 accounted for approximately one-quarter of the global economy but about 65 percent of global stock market capitalization, according to Barclays. Clumsy U.S. policymaking this month provided the catalyst for that investment reshuffle.
'U.S. assets were outperforming. The U.S. economy was outperforming. So by definition, people were holding lots of dollars. What we're seeing today is a normalization of the overwhelming skew toward holding U.S. assets,' said Eric Robertsen, head of global research and chief strategist for Standard Chartered Bank in Dubai.
As the president's enthusiasm for tariffs made the United States look riskier, investments in other markets became more attractive.
In Europe, the German government last month abandoned a constitutional borrowing limit and made plans to spend heavily to spur the economy and fund a military buildup, raising growth prospects. China encouraged higher consumer spending to better balance its export-heavy economic model. And Japanese 10-year government debt offered its highest return in 15 years.
Recent gains by the Swiss franc, the euro, Japanese yen and gold, which is up more than 7 percent in the past five trading days, support the idea that investors are looking for new ways to ride out the turmoil unleashed by the president.
Yet for major institutional investors, giving up on the dollar is not feasible.
The $28 trillion treasury market is the world's largest and most liquid, meaning that investors can quickly sell their holdings if they need to raise cash. In contrast, there are only $1.4 trillion in German government bonds outstanding.
Alternative currencies likewise fall short. The Chinese yuan is assuming a greater role in global commerce. But the Chinese government does not allow capital to move freely across its borders, meaning investors could find their funds trapped.
The euro also is handicapped. Nations that use the euro share a central bank in Frankfurt, which governs the zone's monetary policy. But they lack a common fiscal authority akin to the U.S. Treasury and a common bond market.
'That lack of a fiscal union probably has been the Achilles' heel for the euro. You would need to see more fiscal and political integration in Europe for the euro to become a real credible alternative,' said Frederic Neumann, chief Asia economist for HSBC in Hong Kong.
It's too soon to say whether foreigners led last week's charge out of the dollar, said Marc Chandler, chief market strategist for Bannockburn Capital Markets in New York. Treasury Department data covering transactions through last week will not be available until midsummer.
Even if the era of global dollar supremacy survives the trade war, the currency's short-term outlook might be poor. Trump's imposition of widespread tariffs has made a recession more likely, economists say, which could hurt stock prices and prompt the Federal Reserve to cut interest rates. That would make investing in dollar-based assets less appealing.
'I think the dollar's down trend is just beginning. But there's no need to panic,' Chandler said.
Meanwhile, investors who have been spooked by the president's unpredictable trade policy maneuvers worry about what's next.
The president has returned to his first-term practice of publicly jawboning Fed Chair Jerome H. Powell to cut interest rates, despite tariffs' likely inflationary effects. And some aides have spoken of deliberately weakening the dollar to make U.S. manufactured goods more competitive on world markets.
'I don't think we're quite out of the woods yet when it comes to bond market volatility,' Neumann said. 'And that, in the short term, doesn't help the U.S. dollar either.'