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Steven Kamin was previously Chief of International Finance in the Federal Reserve and is now a senior member of the American Enterprise Institute.
Following the initial save of President Trump of broad base tariffs, on April 2, the prices of the shares fell, the volatility measured by the VIX index shot and the treasury yields shot substantially.
In general, these developments are expected to promote the value of the dollar, which is a “safety flight” currency requested by investors in times of crisis and acute uncertainty. Instead, the dollar value also submerged. In fact, in relation to the predictions of a simple economic model, the dollar fell by the greatest margin in the last four years.
This suggests that turbulence in financial markets was more than only the investors obtained “Yippy”, in Trump’s words. It may reflect the beginning of a serious reconsideration by global investors for the performance and management of the United States economy and the dollar.
The US dollar is the most important currency in the world. More than half of all international trade, even among non -American countries, has a price and invoice in dollars. The participation of the lion in international financial transactions is carried out in dollars. And almost 60 percent of the world’s international reserve are in dollars, despite the US GDP., Only comprises approximately a quarter of world income.
As my colleague Mark Sobel and I have explained, the domain of the dollar is derived from the force and dynamism of the US economy, the undisputed stature of our rule of law, the prudence of our formulation of economic policies and our close cooperative relations with our allies. But we have also warned that if the United States abandons these strengths, they pursue reckless commercial and fiscal policies, break trade agreements, intimidate our allies and undermine support for global institutions, this will encourage other countries to look for alternatives to the dollar. Trump has threatened countries with tariffs if they leave the dollar, but nothing could accelerate this process more effectively than reckless actions against our business partners.
Is this process now in progress? They are the first days, but the financial turbulence surrounding Trump’s chaotic rates, and especially the increase in treasure yields combined with the drop in the dollar, is not a good sign. As indicated in the table below, an increase in the volatility of the financial market (the VIX index) after Trump’s announcement triggered a “cash race” due to leverage coverage funds, feeding a sale of treasury in the treasure bonds that led to high yields.
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The liquidations driven by disappointment in the treasure market are unusual, because the demand for safe assets, such as treasure bonds, tends to increase in times of volatility and crisis, reducing their yields. Undoubtedly, such episodes do not have unprecedented, and a similar sales sale occurred during the Panic COVID-19, 2020, when again both the yields of the treasure and the VIX rose up until the massive intervention of the Fed managed to calm the markets.
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However, there is a notable difference between Covid-19 panic and Trump tariff panic. In the old episode, the dollar, being a “safety” coin, shot next to the VIX as the markets scared.
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On the contrary, in recent days, the dollar seems not to have benefited from the flow flows to security, and has fallen well below its level before the Trump’s April 2 fees announcement:
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How significant is this aberration? To perform a more precise evaluation, we estimate a simple equation that returns the dollar level in 2 -year treasure yield, the difference between 10 and 2 years yields, and the VIX. As shown in the table below, the three variables are very statistically significant and explain 85 percent of the variation in the dollar since 2021:
Below is a graph that compares the real values ​​and predictions of the dollar. There are, of course, many failures between the predicted and reais levels of the dollar, but Trump’s tariff episode at the end of the sample seems to represent the greatest error. The model expects the peak in the vix to increase substantially the dollar, but instead the dollar fell:
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This is confirmed by means of a plot of the regression waste, then. Undoubtedly, the graphic indicates the series correlation of the waste, so the results must be taken with a salt grain. Even so, the lady in the dollar is extraordinarily large:
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Does this mean the end of the domain of the end of the dollar? Probably not. The preeminent role of the dollar in trade, international finance and reserve properties is in place due to the effects of the network, institutionalized practices and the lack of viable alternative currencies, and will take time to erode.
But it is clear that, at least during this episode, the dollar has stopped acting as a “security to security” currency. The simultaneous increase in yields and the fall in the dollar suggests a setback from dollars that can reflect increasing concerns about chaotic management and the implementation of the economic policy of the United States.
