A tariff-induced meltdown of U.S. equity and bond markets has been spooking financial circles. But stocks and Treasuries aren’t the only assets on the fritz—the U.S. dollar is also falling, with analysts warning of a global “de-dollarization” in response to the Trump administration’s frenetic foreign policy decisions.
“We are witnessing a simultaneous collapse in the price of all U.S. assets including equities, the dollar versus alternative reserve [foreign exchange], and the bond market,” writes George Saravelos, global head of FX research at Deutsche Bank, in a note this week. “We are entering unchart[ed] territory in the global financial system.”
Even as markets tank and bond yields rise, the dollar is down to a three-year low this week. In a more typical environment, markets would be “hoarding” dollars as a safe haven from the other noise, says Saravelos, and the dollar would be strengthening. But what Trump has unleashed on global markets is far from typical. Now, other countries are losing faith in the U.S. and actively selling down U.S. assets, possibly upending the dollar’s global reserve status.
This is a problem, as the U.S. dollar’s exceptionalism is subsidized by other countries: Foreigners invest nearly $2 trillion in the U.S. every year. Foreign investors, both individuals and governments, own 30% of U.S. debt. Seeing them heading for the exits is cause for major concern, not least because it could lead to increased borrowing costs for the U.S. at a time when the national debt is ballooning.
Analysts would be less worried about the recent volatility if the U.S. government was committed to maintaining the dollar’s reserve status. But Stephen Miran, chair of the White House Council of Economic Advisers, gave a speech this week in which he said the primacy of USD is “costly,” alleging it makes U.S. labor and products uncompetitive.
So where does that leave investors? Some are looking for reassurance in assets like gold, German bunds, Swiss francs, and the Japanese yen, says Gary Schlossberg, global strategist at Wells Fargo Investment Institute.
But it isn’t time to give up all faith in the USD, he says—market collapse isn’t imminent. The current erosion in its strength can still be reversed. Because although considerable damage has been done over the past few months, the pillars of U.S. exceptionalism are still in place: The U.S. market is still deeper, more liquid, more developed, and more efficient than any other. Though some have positioned the euro as a possible alternative, Europe is far more fragmented than the U.S., and faces risks of disintegration.
“Certainly there is a withdrawal from the U.S.,” says Schlossberg, noting that it’s a reflection of the deep unease within markets. But “the dollar is going to remain the centerpiece. There are so few alternatives out there.”
Global confidence in the U.S. is shaken
That said, Schlossberg and other analysts have noted that the current market environment is substantially different from previous shocks. Take the 2011 credit downgrade of U.S. Treasury debt. At that time, investors looked through it, and still considered the dollar a stable safe haven, preventing a rollover of the market. During the 2008 financial crisis, governments came together to right the ship.
But the Trump administration’s tariff policies and intention to silo U.S. manufacturing from other countries is a different beast, upending decades of agreed-upon rules and threatening the U.S.’s role as the world’s de facto leader. The ramifications are likely to be longer-term.
“You’re talking about basically removing, by degree, the U.S. from the global economy,” Schlossberg says. “I don’t mean to suggest that we’re on the verge of a collapse in the trade and payment system that goes back to World War II, but it just creates uncertainty.”
Creating even more uncertainty is how fluid Trump’s policies have been. Within just a few weeks, he has implemented tariffs, changed them multiple times, and now frozen some of them, although the blanket 10% tariff on most countries and 145% tariff on China is currently in place. As all of this has been done by executive order—and not codified by Congress into law, though tariffs are in its purview—it can easily be rescinded or replaced, as Trump himself has already done. All of this is eroding trust in the U.S., which will be hard to undo even if all of the policies were reversed. The big winners from all of this are the euro and the yen, analysts say.
Schlossberg says jittery investors should talk through their feelings with a financial advisor, and get their read on how they view the market environment changing. But for now at least, the fundamentals remain: Diversify your holdings to include both U.S. and international exposure, consider gold as a safe haven, and consider upping your cash allocation for the time being. Don’t get “too over your skis” trying to find alternatives in a rapidly changing environment.
“Optimistically you can say, this too shall pass, the turbulence that’s been created. It’s not Armageddon tomorrow,” says Schlossberg. “I mean, this may reverse on Monday.”
