What shows the bad dollar day

Unlock the editor’s summary for free

Roula Khalaf, editor of the FT, selects her favorite stories in this weekly newsletter.

Good day. You probably do not need without charge to tell you that it was a very unpleasant day on Wall Street yesterday. The S&P 500 fell 5 percent, with banks and technology taking an absolute roof while the hiding holes sectors such as basic food and health care. Treasury yields fell. A classic flight from the risk, with some surprising wrinkles, such as a decrease in gold. Next, we looked at another movement that caught the guard: the great fall of the dollar. Send us your thoughts: robert.armstrong@ft.com and aiden.reiter@ft.com.

The bad dollar day

American tariffs, according to the history of consensus, push the dollar. Tariffs are a lower import demand, resulting in that less dollars are exchanged for foreign currencies. That decreases the demand for euros, yen and the rest, and increases the relative value of the dollar.

On Wednesday, President Donald Trump announced the highest US rates in almost a century, and the dollar weakened thereafter. Yes, strange things happen on days like yesterday, when markets have to quickly reorganize financial furniture after a great shock. But the 1.6 percent drop in the dollar index, the largest fall of one day since 2022, resembles the continuation or acceleration of a trend that began earlier this year. It is important to understand what is happening here:

There are many possible explanations, and some may be working in concert.

Markets can know that there is more news in rates, and soon. The reprisals of the United States commercial partners are on their way. Trump can go back when he is pressed, as he has done in the past. Of Calvin Tse, Head of American Strategy and Economics at BNP Paribas:

Our framework for currencies [markets] When entering today it was that for the new tariffs to have an impact, there were elements of size and duration to consider. Specifically, for the USD to join materially, tariffs would have to be much larger than expected and also remain in place for a significant period. [Only] The first prerequisite has been met.

The second possibility is that the decrease in the dollar is the result of the fall in treasure yields in relation to other sovereign bonds. The arbitration opportunity means that the coins closely follow the differentials of rates. But this cannot be the story, as James Athey of Marlborough Group pointed out. Look, at the end right in the table below, how the dollar-Europe exchange rate and the differential between the two-year bonds of the United States and Germany separated yesterday, with the dollar falling further:

Another possibility is that global investors, who have been very overweight of the United States risk assets, have decided to reduce. The sale in dollars that it requires could exceed foreign flows in the treasure bonds. This type of rebalance, says Ahey, is “a great (and I mean a huge) risk due to the scope of foreign property of US assets, for particular actions (foreigners have 18 percent of the US shares market. UU This year.

Historically, however, there have been few cases from the United States that fall into a recession of which the rest of the world emerges unharmed. Trump tariffs will damage the economy of the United States; It is almost certain that they will hurt other economies. And in times of world problems, investors have tended to go to dollars and dollars as a safe shelter (this is half of “the dollar smile”; the other half is when the dollar increases in boom time).

If the risks for the world economy increases and, nevertheless, the dollar weakens, is the special state of the dollar eroding? From Thierry Wizman in Macquarie Group:

We know that this role of the USD as a “shelter” was already attenuating in the first quarter of 2025. That is because the weekly profits of the dollar. . . It had been correlated more negatively with the weekly performance of the stock market. . . That is a pattern that we attribute to the associated loss of American exceptionalism under the impulse of a more ‘native’ commercial regime for the United States.

Not everyone agrees with Wizman that a dollar change was already underway. “There is no evidence that money is leaving the United States in mass,” said Michael Howell from Crossborder Capital. “He [capital] Flow data does not support that meal to carry; At the end of February, there was no evidence of changes outside the dollar. [Recent] The movements in the dollar index are not enough to suggest that there is a secular change away from the United States. ”

However, the trial will reserve at the end of exceptionalism in dollars. But there is another less great explanation than is happening. Differences in fiscal impulse in the United States and other countries are clearly contributing to the relative weakness of the dollar. The United States comes from years of economic performance, partly promoted by a massive tax stimulus. Under Trump and Republicans, it is likely that the amount of fiscal stimulus is lower. Meanwhile, China and Europe seem to establish their expense.

We still have a lot to learn about the economic impacts of Wednesday’s rates. When Trump surprised the world for the first time with tariffs in 2018, we lived in a very different world, says MANJ Pradhan of Talking Heads Macro:

At that time, there were two years for a presidential election, and there were many possibilities at that time that there would be six years more than a Trump administration. . . There was no inflation, less concern for deficits or debt sustainability, or questions about whether the Fed would continue to wait. This time, we have inflation levels that are worrisome [and] Trump has razor majorities at home. Any retaliation that may have could affect growth, and there is the possibility that half of intermediate exams can really change things.

We are in a new world. The dollar will not be the last to surprise us.

(Reiter and Armstrong)

A good reading

This seems like a violation of privacy, but we are definitely buying the book.

Unbound ft podcast

Can’t you have enough to charge? Listen to our new podcast, to obtain a 15 -minute dive in the latest news of financial markets and headlines, twice a week. Put up a day with the past editions of the newsletter here.