This shift comes amid a backdrop of fluctuating trade policies under Donald Trump, causing ripples across global markets. The euro has soared to a three-year high, while gold has reached a new all-time peak, signaling a flight to safer assets. Meanwhile, the yen has climbed to a multi-month high following a selloff in U.S. stocks and Treasuries. Even the Chinese yuan has shown resilience, strengthening despite ongoing trade tensions with the U.S.
The rollercoaster ride began when Wall Street stocks plummeted after a brief rally on Wednesday. Donald Trump had temporarily halted higher tariffs on several trading partners, but the relief was short-lived. The market's mood soured as Trump intensified tariffs on Chinese imports to a staggering 145%, escalating tensions between the world's two largest economies.
Investors no longer believe there's a grand plan
The Chinese yuan, which had hit a record low earlier in the week, rebounded sharply, only to waver slightly in the latest session. Nomura strategist Naka Matsuzawa expressed concern over the lack of confidence in U.S. policies, noting a "no confidence vote" from both equity and Treasury market participants.
Despite U.S. Treasury Secretary Scott Bessent's claims that the tariff rollback was a strategic move to encourage negotiations, the market's reaction suggests otherwise. Trump's unpredictable approach to trade has left global leaders and business executives bewildered, complicating market forecasts.
The dollar's decline was notable: it fell 1.2% to 0.81405 Swiss franc, a level unseen since January 2015, and slid 1.1% to 142.88 yen, the weakest since September 30. The euro surged 1.7% to $1.13855, a height last reached in February 2022. The dollar index, which tracks the greenback against six major currencies, dipped below 100 for the first time since July 2023.
According to Stephen Jen, the CEO of Eurizon SLJ asset management, the dollar appears set to embark on a multi-year correction against a wide range of currencies, even in the absence of a trade war, as the dollar’s lofty Wall Street valuation runs up against Main Street reality.
A move towards dedollarization?
"This episode has raised the question of whether the “Dollar Smile” has stopped working, as this rule of thumb would suggest that a risk-off scenario should lead to a strong dollar," he told Reuters. "But I don’t think the dollar smile is obsolete. I think what’s happening is that the dollar’s lofty clearing price in asset markets is finally converging with its real value in the goods market."
He believes that trade globalisation has enriched the rest of the world over the past quarter of a century, but a multi-polar real world has not been accompanied by a multi-polar financial world: the dollar and dollar assets have continued to dominate. This unipolar financial world means that there has been huge foreign demand for USD assets, disproportionate to the relative size of the U.S. economy. This has arguably led to an over-valuation of the dollar, ever-larger external deficits for the U.S. and an uncompetitive manufacturing sector, as the cost of manufacturing labour has priced the U.S. out of global markets. "The dollar index was around 19% too expensive at the end of 2024, according to our valuation framework, using the median valuation across 34 currencies," he said.
Globally, the dollar is still king, accounting for 59% of foreign currency reserves and 64% of world debt. But the winds of change are blowing. Deutsche Bank warns of "dedollarization" in response to Trump's tariffs. The global financial system seems to have entered uncharted territory: “We are witnessing a simultaneous collapse in the price of all US assets, including equities, the dollar against alternative reserve currencies and the bond market,” said Deutsche Bank analysts.
President Trump's tariffs have potentially left a lasting mark on the U.S. dollar, shaking the confidence of investors and prompting a global search for alternatives.
