Despite a general market recovery, the U.S. dollar did not recover from this week’s turmoil.
The market’s recovery from this week’s lows has many positive aspects for investors; just avoid focusing on the US dollar.
Following President Trump’s shift on Greenland, stocks and Treasurys partially recovered, but the US dollar was unable to keep up and had its worst week in eight months.
The value of the US dollar relative to a basket of competitors is measured by the ICE U.S. Dollar Index DXY, which had a 1.9% decline this week, its worst weekly performance since May 23. According to FactSet data, that contrasts with the S&P 500 SPX’s approximately 0.4% decline over the same time period and the Nasdaq Composite COMP’s flat weekly performance.
That may indicate that President Trump’s recent use of tariff threats and his foreign policy since taking office a year ago have further damaged the dollar’s standing in international financial markets.
“The April 2 [tariffs] opened up new dimensions – and not friendly dimensions, in terms of U.S. tariff policy,” stated Steve Englander, Standard Chartered Bank’s global head of G-10 foreign-exchange research. “The move on Greenland, even if it’s walked back, was something nobody was talking about before January.”
However, Englander pointed out that Wall Street is now on guard about any spillover concerns, particularly with regard to U.S. relations with Europe and Canada: “It’s not just Greenland.”
That has dampened the confidence about a possible dollar recovery going into this year. “The pattern that we’ve seen is that whenever policy moves, it expands the envelope of policy options in a way that’s potentially disruptive, and the market’s reaction is to sell the dollar,” Englander stated.
Trump withdrew his most recent tariff threat on Wednesday, saying he would give up on his plan to levy fresh duties against European allies, following a steep decline in stock prices on Tuesday. Additionally, he laid out the “framework of a future deal” pertaining to Denmark’s Greenland, a region the president had previously sought to acquire.
Following Trump’s tariff reversal, all three main U.S. market indices had a two-day bounce, regaining the majority of Tuesday’s steep losses before closing mixed on Friday. However, market analysts warned that the stock market rebound might only be a short-term reprieve for investors. Additionally, they did not rule out other policy shocks from the Trump administration or the possibility of a future U.S. escalation on Greenland.
According to Larry Hatheway, head of research at the Franklin Templeton Institute, the dollar’s decline on Friday was influenced by recent events in Japan. The Japanese yen (USDJPY) surged 1.6% after market speculation that the BOJ might interfere in the currency market to strengthen the yen, which has recently struggled versus other currencies, despite the Bank of Japan keeping interest rates unchanged on Friday as anticipated.
“Those market events that have occurred in the first three-and-a-half weeks of this year are beginning to shift the fortunes back towards foreign-currency strength or, conversely, a weaker dollar,” Hatheway stated during a Friday phone interview with MarketWatch.
Some predict a difficult future for the dollar, particularly if the “sell America” movement picks up steam in the coming year.
“We fully expect the [ICE U.S. Dollar Index] to continue to grind down and would not be surprised to see it reach 95 this year,” stated Peter Azzinaro, a senior partner at Florida’s Agile Investment Management. At the last check on Friday afternoon, the index was trading at 97.48.
“What will drive that is continued diversification out of the U.S. and into Europe, parts of Asia and emerging markets,” he stated. “Over the last decade, the market has been overweight the U.S., and there’s been a realization that there are better opportunities outside of the U.S.”
The ICE U.S. Dollar Index may drop below 90 and into the 80s during the next two to four years, according to Azzinaro, who said the dollar is currently in the middle of a three- to five-year cycle that started early last year.
“The rotation out of the U.S. and into Europe is the most promising rotation in more than a decade because of additional fiscal stimulus in Europe,” he said.
Contributions came from Ken Jimenez and Vivien Lou Chen.
