The strong dollar, which is typically a refuge in times of market-based stress, is collapsing, and its continuous decline this year suggests a much more serious issue for all U.S. assets.
This is because, after a historic gain and significant selloffs in stocks over the last week, the declining value of the dollar is being matched by a huge selloff in U.S. government debt and whipsaw action in all three major stock indices, DJIA SPX COMP, on Friday. According to a team at Evercore ISI, a research division of the New York-based investment-banking advising firm Evercore, such coincident moves—falling dollar, bonds, and stocks—like the ones witnessed this week are “rare, ugly, and worrying.”
As tariff-driven volatility continued to engulf U.S. financial markets, the dollar fell to its lowest levels in two to three years on Friday. In order to understand what investors and traders throughout the world are currently experiencing, analysts and strategists were looking for historical parallels.
The Nixon shock, which occurred almost fifty years ago, is one instance that springs to mind. At that time, President Richard Nixon implemented a number of policies that put the American economy first, including the abrupt decoupling of the dollar from gold (GC00) to shield the greenback from foreign speculators. Nixon’s actions had the unexpected consequence of being viewed as the cause of the stagflation that engulfed the United States in the 1970s, which is defined as sluggish economic growth combined with rising inflation.
“What we are going through now is worse than when former President Nixon took us off the gold standard in August 1971,” stated Marc Chandler, chief market strategist for Bannockburn Global Forex, based in New York. He compared the harm caused by tariff-driven volatility to the Coca-Cola Co.’s (KO) 1985 decision to introduce “New Coke,” a reformulated version of its well-known beverage, which sparked customer outrage. “The biggest damage right now is to the U.S. brand,” he added.
“There is talk of a capital strike against the U.S., with many people suggesting there’s pressure from foreign investors selling American assets,” Chandler stated via phone. He added that there are concerns about the United States’ ability to maintain its position as the world’s dominant nation. All of this is taking place when hedge funds are winding down a well-liked tactic called the basis trade, which is probably a factor in the recent increases in Treasury yields.
The ICE U.S. Dollar Index DXY, which compares the value of the U.S. dollar to a basket of six other major currencies, was down 0.5% at 100.37 as of afternoon trade in New York after earlier in the day briefly hitting its lowest level in the previous two or three years. This year, it has decreased by nearly 8%.
In the meantime, as U.S. government securities aggressively sold off, Treasury rates were skyrocketing, with the 10-year yield BX:TMUBMUSD10Y up more than 10 basis points at 4.5% and the 30-year yield BX:TMUBMUSD30Y on course to rise for a fifth straight session. After finishing Thursday’s session with their worst performances in nearly a week, all three main stock indices fluctuated between gains and losses.
U.S. equities saw the largest point gains on record when Trump said in the middle of the week that he would offer most nations, with the exception of China, a lower 10% tax for 90 days, but the optimism was short-lived.
The ongoing trade battle between the United States and China, in which the latter has escalated its tariffs on American goods to 125%, engaged traders and investors on Thursday and Friday. The United States has explained that its own 145% duty on China is reduced to 125% due to retaliatory actions and an additional 20% because of fentanyl.
Krishna Guha, the vice chairman of Evercore ISI, and others wrote in a note on Friday that the “rare, ugly and worrying combination” of moves in the dollar, bonds, and stocks this week coincides with market players “pressing for a bigger U-turn with either a complete cessation of tariffs ex-China, or negotiations with China, or both.”
“Currency lower, bonds lower, and stocks lower spell capital outflows, which interact with hedge-fund deleveraging,” the Evercore ISI analysts stated. “There is no global scramble for dollar liquidity, global investors are selling dollar assets instead.” furthermore, “this is not about stagflation. … It reflects evaporating U.S. growth exceptionalism and the reduced attraction, at the margin, of dollar assets for reserve purposes amid erratic U.S. decision-making,” among other factors.
The phrase “U.S. exceptionalism” refers to the distinctive features of the American financial system and economy that make it more alluring than other countries. Furthermore, the U.S. dollar’s appeal seems to be rapidly diminishing at the present.
“The damage to the USD has been done: the market is reassessing the structural attractiveness of the dollar as the world’s global reserve currency and is undergoing a process of rapid dedollarization,” said the analyst. “Nowhere is this more evident than the continued and combined collapse in the currency and U.S. bond market as this week comes to a close.”
