After a tumultuous year for the US dollar that recently saw it reach its lowest point in over three years, life could be about to get more interesting. On Monday, the dollar fell 1.1%. Part of that picture is the decline measured by the US dollar index, which tracks the US dollar’s strength against six foreign currencies. This downturn raises concerns about growing investor concerns over the stability of US markets. It highlights the risk of a ripple effect on the wider economy.
There are a number of causes behind the dollar’s current weakness. One of the biggest factors is the sustained public criticism of Federal Reserve chair Jerome Powell by ex-President Donald Trump. These criticisms have added to doubt about the Fed’s independence and its capacity to make politically neutral monetary policy decisions. On the flip side, analysts have noted that this lack of new trade deal announcements only deepens the worrisome trade deal trends. They warn that negotiations on tariffs alone could take six months.
The faster the U.S. dollar depreciates, the greater the warning bells that go off for investors. USD dollar depreciation led to investors running away from the USD. In reaction, gold prices have exploded as investors flee to safer assets. As of Monday, the yield on the 10-year Treasury had spiked to 4.365%. This increase represents a further jump from recent trading sessions and underscores the continuing rise in the costs of borrowing, as economic uncertainty continues to swirl.
As Macquarie analysts observed, the effect of the USD flight is focused mainly on shaking confidence in the Fed’s independence. Yet they raised an alarm about announced trade deals, reminding everyone that politics and the economy go hand in hand.
The worry over what a long-term impact of Trump’s tariff agenda might have on the economy is weighing on market spirits. As tariffs remain a focal point for investors, many are anticipating how these policies could affect economic growth in the long term.
On another note, President Trump took another swat at Fed Chair Powell this week. Jonas Goltermann added that this is yet another reminder as to how the administration’s unique approach has the ability to compromise the dollar and US asset markets outside of trade policy.
Investors are becoming increasingly risk-averse. The recent plunges in the stock market are a telltale signal of a deepening lack of confidence in Trump’s economic policies. “Recent market action shows a loss of confidence in Trump economic policy,” stated Krishna Guha, pointing to a broader trend of skepticism towards government strategies.
Others remain of the view that investor focus will soon shift back to corporate earnings. This change is inevitable as firms prepare to enter the new Q1 2025 earnings reporting window. Tariffs are likely to steal the show in the next few months. It’s very likely investors will start to focus on the Q1 2025 earnings reporting period,” said Sam Stovall.
Given these unfolding circumstances, consumers and investors alike are watching the dollar’s path with everyone’s interest firmly fixed on which way the dollar will be heading. Together, surging Treasury yields and tumbling currency values mark another bout of Americana volatility in the US markets.
To the former, Powell has signaled that the Federal Reserve will be in a wait-and-see mode. They want to look at the overall macroeconomic impact of tariffs on the economy before making a move. Morgan Stanley analysts noted that Powell further reiterated the Fed’s ongoing “wait and see” stance. They mentioned the Fed’s seriousness in considering the effects of tariffs on the economy.