Repeated tariff changes have hit the dollar hard! 'American Brand' crisis looms behind Wall Street's panic sell-off

The Zhitong Finance App learned that on Monday, global trade clouds pushed the US dollar exchange rate to a six-month low, which made investors generally expect this decline to continue.

The Bloomberg US Dollar Spot Index fell for the fifth consecutive trading day, with a cumulative decline of 3.3% during this period. Although news of Trump's delay in imposing tariffs on some popular consumer electronics products boosted treasury bonds and the stock market, his warning that exemptions would be temporary cast a shadow over the dollar's outlook.

The dollar and US Treasury bonds are generally seen as safe havens during turbulent times, yet they continue to be sold off, which heightens concerns that investors are reducing their holdings of US assets in the face of major changes in trade policies and wider political uncertainty.

Jordan Rochester, head of macroeconomic strategy at Mizuho International EMEA, said that the weakening dollar and US Treasury bonds is a “terrible and harmful combination.”

The Bloomberg Dollar Spot Index closed down 0.3% on Monday. The index has fallen by about 6.1% so far this year, and is expected to record its biggest annual decline since 2017.

The position situation in the options market indicates that traders are hedging the risk of a further decline in the US dollar. The index that measures the three-month risk reversal of the dollar against major currencies (that is, the spread between call and put options) has fallen to a five-year low.

This indicates that demand for put options that benefit from the weakening US dollar is higher than demand for call options that benefit from the strengthening of the US dollar.

The S&P 500 index rose 0.8% on Monday. The 10-year US Treasury yield fell 11 basis points to 4.38%. As concerns about Trump's trade war triggered a five-day sell-off in the bond market, 10-year US Treasury yields saw their biggest weekly rise in more than 20 years last week.

causing lasting damage?

For much of the past week, discussions on Wall Street focused on whether Trump's actions caused lasting damage to the idea that the dollar and US Treasury bonds were ultimately risk-free assets, even if those actions were eventually reversed.

Steve Barrow, strategist at Standard Chartered Bank, wrote in a note to clients on Monday: “We're talking about an institutional shift in the way the market views the dollar, especially in times of global financial tension. We should point out that another key component of America's safe-asset appeal — the treasury bond market — is also not particularly secure.”

This view was shared by Derek Halpenny, head of global market research at the Bank of Mitsubishi UFJ. He followed Trump's remarks last weekend and US Secretary of Commerce Howard Lutnick emphasized a long-term plan to levy different specific taxes on the technology industry.

Halpenny wrote in a report: “It's hard to see any fundamental factors that might improve investor sentiment. The dollar fell below a critical level last week.”

The weekly risk reversal indicator for the Bloomberg Dollar Index has balanced for the first time in five days, which indicates that traders' bearish sentiment towards the US dollar has weakened. However, the indicator has been in the negative zone for the third day in a row, and bearish sentiment against the US dollar has reached its highest level since the pandemic.

Skandinaviska Enskilda Banken AB strategist Dana Malas wrote: “Trump's actions continue to damage the 'American Brand'. This means that US and foreign dollar assets should continue to bear higher risk premiums.”

According to a survey, nearly 80% of respondents expect the US dollar to weaken further next month, the highest bearish percentage since the survey was conducted in 2022.

The strategists at some of Wall Street's biggest banks also believe that the dollar is likely to weaken further.

Analysts at J.P. Morgan Chase said that investors continue to be bearish on the US dollar, especially against the yen and the euro, because the US is still likely to fall into recession. Mizuho Bank predicts that, based on the US dollar's performance in 2017-2018 and during the pandemic, the dollar may fall by another 5% on a trade-weighted basis before rebounding.

Goldman Sachs analysts, including Kamakhya Trivedi, wrote: “The design and implementation of these tariffs should have a negative impact on the currency because they weaken consumer and business confidence.”

They said, “If tariffs put pressure on the profit margins of US companies and the actual income of American consumers, as we expect, they will weaken this exceptionalism and in turn destroy the core pillar of a strong dollar.”