The dollar's decline confuses markets despite expectations of a rebound.
The US dollar recorded its worst losses against major currencies in nearly three years, suffering its worst daily loss since 2022 during Friday's trading. Investors are wondering whether it will recover quickly or whether this setback could last a long time.
According to an article written by economist Robert Armstrong and published in the British newspaper, the US dollar has performed poorly in the wake of Trump's tariff decisions. However, what is striking is that this poor performance contradicts all expectations, as "people agree that US tariffs should push the dollar higher because they reduce demand for imports, which reduces demand for the euro, the yen, and others, and increases the relative value of the dollar."
Armstrong says, "Strange things can happen on days like these, when markets have to quickly reposition themselves after a major shock."
Calvin Tse, head of US strategy and economics at BNP Paribas, says, "Our framework for foreign exchange markets today was that for new tariffs to have an impact, both magnitude and duration must be considered. Specifically, for the US dollar to appreciate significantly, the tariffs would have to be much larger than expected and remain in place for a long time. Only the first condition has been met."
But Armstrong says there is a possibility that the dollar's decline is due to lower yields on US Treasury bonds compared to other sovereign bonds.
Economic analyst James Athey says, "Another possibility is that global investors, who had been overweight riskier US assets, have decided to reduce their investments." The dollar sale required for this could outpace foreign inflows into Treasury bonds.
The Financial Times article argues that Trump's tariffs will hurt the US economy and will almost certainly hurt other economies even more. It notes that "during periods of global turmoil, investors tend to flock to the dollar and its assets as a safe haven, which hasn't happened this time, and the dollar has fallen."
Some analysts say a shift away from the US dollar has already begun, but Michael Howell, an analyst at Crossborder Capital, says, "There is no evidence that money is leaving the US in large numbers." He adds, "Capital flow data doesn't support these conclusions. At the end of February, there was no evidence of a shift away from the dollar. Recent movements in the dollar index are not sufficient to indicate a long-term shift away from the US."