King Dollar Rocked by Trump’s Assault on World Economic Order

(Bloomberg) — As US stock prices tumbled this month, John Sidawi, a fund manager at Federated Hermes, noticed something strange.

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The dollar, long a go-to hiding place during market selloffs, wasn’t rallying this time as investors rushed for safety. It was sinking, too, and fast as hot money poured into gold, the yen, European stocks — almost anywhere but the US.

“It’s unusual and very telling,” said Sidawi, who helps oversee bond investments at the firm. “The dollar, in an environment where it should be acting like a safe haven, is not.”

That, as with so much of the volatility that has whipsawed global markets recently, has a singular explanation: President Donald Trump.

Just two months into his second term, his escalating fusillade of tariffs and bid to roll back decades of globalization is shaking confidence in the US currency — which has had a privileged place at the heart of the world financial system for eight decades.

The dollar has dropped against all but a handful of the 31 major currencies over the last three months, sending Bloomberg’s dollar index down nearly 3%, its worst start to a year since 2017. The price of gold — a rival haven — has surged to a record high of over $3,000 an ounce. By mid-March, speculative traders started betting against the dollar for the first time since Trump’s election amid fear his policy shifts could drive the world’s largest economy into a recession.

“As opposed to being the usual bastion of stability and first choice haven for foreign-exchange market operators, the greenback instead now stands as quite the opposite,” said Michael Brown, a senior research strategist in London for Pepperstone Ltd., one of the largest currency brokerages. He said an increasing number of clients are asking “where should I be looking at as opposed to just switching on the autopilot and hiding in the dollar?”

The recent drop hasn’t significantly eroded the strength of the dollar, given how much it had previously risen on the back of the nation’s strong economy and elevated interest rates, and it could bounce back if worries about a global slowdown cause overseas investors to pile into US Treasuries. It also remains solidly entrenched as the world’s key currency, used for the majority of central bank reserves and for the purchase of commodities like oil, in large part because no significant alternative has emerged.

“The rise and fall of currencies is not something that occurs because you get a wildcard president that is doing his best to kill globalization,” said Carmen Reinhart, a Harvard University professor and former World Bank chief economist. “The dollar did not overtake the British pound as a reserve currency overnight.”

But Trump’s actions are rekindling long-simmering discussions about whether overseas governments will accelerate efforts to less reliance on the dollar. In Europe, leaders have seen it as an opportunity to strengthen the euro’s role by creating more integrated, liquid markets that would allow the common currency to better rival the dollar. In the developing world, a handful of countries have also periodically floated the idea of banding together to challenge the dollar’s supremacy.

Trump has said he wants to maintain the dollar’s central role globally, once threatening to retaliate against any country that tries to untether its trade from the US currency. At the same time, during his campaign he indicated he’d welcome a weaker dollar because it would make US products more competitive. That’s spurred speculation that he could be using his trade war to strong-arm governments into cutting a grand bargain that would do just that, though the White House hasn’t publicly floated any such plans.

Yet those goals — of either maintaining the dollar’s standing, or persuading other governments to act in the interest of the US — seem out of sync with Trump’s isolationist agenda and approach that has alienated allies.

In a note to clients Thursday, Jane Foley, a strategist in London for Rabobank, said Trump’s trade policies, pullback from military alliances, and casual talk of taking over Canada or Greenland has undermined trust in the US in a way that “could accelerate the trend to de-dollarise and undermine the value” of the US currency. At Deutsche Bank AG, George Saravelos, the global head of FX strategy, warned clients this month that the chance of the dollar losing its safe-haven status as markets adjust to a new geopolitical order “needs to be acknowledged as a possibility.”

In the markets, such long-term considerations are taking a back seat to more immediate repercussions.

US stocks slid again this week, with the S&P 500 Index falling another 2% Friday, after he hit foreign carmakers with tariffs. Traders are now hanging on his plans to announce what may be his biggest salvo yet — a slate of blanket increases — on April 2, which he has taken to calling “Liberation Day,” based on his belief that raising barriers to imports will create jobs as companies produce more domestically.

In theory, tariff increases should strengthen the currency by reducing demand for imports and bolstering domestic factory output. But it has depreciated instead because the scale of Trump’s hikes risks both reigniting inflation and slowing growth. Administration officials have downplayed such concerns as a potential side effect of a program — which includes slashing government payrolls and cutting spending — that will eventually rejuvenate the economy.

That short-term pain is what’s worrying Wall Street. After staging one the strongest two-year advances since the dot-com bubble of the 1990s, the S&P 500 Index has slumped 9% since mid-February, weighed down by concerns about the economy and the heady valuation of tech stocks after the artificial-intelligence boom.

At the same time, Trump’s clashes with European allies over the cost of defense has unleashed a surge of spending by Germany that’s could stoke the region’s economy. That’s fueled a European stock rally this year that has delivered double-digit gains, which may cause investors to shift cash there from the US.

“If that money flees as people begin to doubt the geopolitical and economic fundamentals of the US, you could get the dislocations that would force the US stock market lower and the dollar as well,” said Thierry Wizman, a macro strategist at Macquarie Group in New York.

Barry Eichengreen, an economist at the University of California, Berkeley, who has written extensively on the dollar, has been focused on the longer-term risks.

The US currency’s central role — which has allowed the country to avoid the sort of debt crises seen elsewhere by propping up demand for Treasury bonds — won’t easily be displaced because the size of the US debt market makes it the most liquid in the world, allowing investors to trade large blocks of securities without affecting the price.

And yet, he said, it can’t be ruled out. “The dollar has not lost its safe-haven status,” he said. “But we must seriously contemplate the possibility.”

—With assistance from Masaki Kondo, Anya Andrianova and Liz Capo McCormick.

(Updates to add Friday’s closing prices. A previous version of the story was updated to correct the time reference to a stock market move.)

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