The tariff list introduced by the Trump administration in early April triggered severe fluctuations in global financial markets, with international crude oil futures plummeting 20% and stock market volatility nearing the 2020 circuit breaker crisis. Traditional safe-haven assets like U.S. Treasuries faced an unusual wave of selling. The 30-year Treasury futures fell nearly 10% in one week, with yields soaring 56 basis points in three days, marking the largest increase since 1982, as the arbitrage mechanism between Treasury futures and spot markets approached collapse.
This tariff war is dismantling the foundations of dollar hegemony. Over the past few decades, the dollar has been exported globally through trade deficits, with countries returning dollars to the U.S. Treasury market, forming a 'dollar tide' that supports low interest rates and high consumption in the U.S. However, the protectionist policies of the Trump administration are breaking this cycle:
Crisis of Trust in the U.S. Treasury Market
Global investors are accelerating their withdrawal from U.S. Treasuries, with liquidity crises in Japanese financial institutions resulting in a chain reaction of continued reductions by certain countries, deepening the inversion of the Treasury yield curve, as the 30-year Treasury rate breaks 4.6%, highlighting characteristics of Ponzi financing.Dollar Demand Logic Reversal
Tariffs raise import costs, intensifying inflationary pressures in the U.S., while the Fed's room for rate cuts is constrained. More critically, when the safety of dollar assets is in doubt, international traders turn to barter, shaking the credit foundation of the dollar as the global reserve currency.The Paradox of Manufacturing Reshoring
While tariff barriers can protect U.S. industries in the short term, they accelerate the restructuring of global supply chains. Emerging markets like China are becoming less reliant on the dollar, and domestic manufacturing costs in the U.S. are excessively high (for example, the cost of Toyota's North American battery plant is 16 times that of Chinese firms), making the goal of reshoring equipment manufacturing increasingly elusive amid globalization's backlash.
This 'self-harming' trade war is pushing dollar hegemony towards a historical turning point. As global demand for dollars shrinks and liquidity in the U.S. Treasury market dries up, the Fed's 'printing power' will ultimately lose its magic. The Trump administration's attempts to reconstruct the economic order through tariffs may inadvertently bring an end to America's core competitive advantage—the international credit status of the dollar.
