The dollar has been tumbling. It may have further to fall.
Summary
An unusual dynamic has led some to worry that U.S. investments are losing their appeal as a global safe haven.
The WSJ Dollar Index is down about 3.7% since April 2.
The dollar has had a rough month. It could have farther to fall if President Donald Trump’s trade war sours foreign investors’ appetite for U.S. assets and puts a drag on U.S. economic growth.
The WSJ Dollar Index is down about 3.7% since April 2, when Trump unveiled his controversial plan to impose so-called reciprocal tariffs on goods imported from dozens of nations. While the greenback rose 0.3% on Tuesday, the gains follow a five-day losing streak, according to Dow Jones Markets Data.
All in all, the dollar has tumbled more than 9% since its 52-week high in January. What’s more, the weakening dollar has been accompanied by rising U.S. bond yields, an unusual situation that has led some to worry U.S. investments are losing their appeal as a global safe haven.
In a note Tuesday, market watcher Yardeni Research theorized the dollar’s selloff was tied to investors moving money out of U.S. assets and into European counterparts, given recent gains by the euro.
The firm added that Chinese state asset managers could also be selling Treasuries and buying European bonds as a form of economic retaliation against the Trump administration. “If just a bit of selling pressure by foreign investors could cause so much angst in U.S. financial markets, that would suggest the US’s fiscal situation is very fragile," the firm wrote.
Given its relative strength in the past several years, the dollar may continue to fall. Despite tumbling sharply over the past two months, the greenback remains about 20% above its long-term average versus other major currencies, noted Goldman Sachs chief economist Jan Hatzius in a report Monday.
In addition, Hatzius suggested the U.S. government’s protectionist stance could further undermine so-called U.S. exceptionalism, which has helped drive the U.S.’s outsize stock market gains in recent years. “Perhaps more importantly, the turn toward protectionism has weakened the case for U.S. growth outperformance not only in the short term but also in the longer term," Hatzius wrote.
For investors the immediate impact of the weaker dollar is mixed. In theory, a weak dollar should make it cheaper for foreign consumers to buy U.S. goods, potentially boosting earnings at American companies. Of course, a trade war that throws up retaliatory tariffs against U.S. goods would scramble all that.
The dollar’s decline has benefited U.S. investors who own foreign stocks. A weaker dollar makes foreign company earnings comparatively more valuable to U.S. investors. Over the past 100 days, the MSCI Europe equity index has outperformed the S&P by nearly 16 percentage points, notes DataTrek co-founder Nichalas Colas in a report Tuesday. Nearly half of that outperformance is due to the strengthening pound and euro, he calculates.
The big long-run risk is that Trump’s saber rattling will ultimately underline foreign investors’ faith in the dollar as a global safe haven currency. While the prospect seems remote, it’s no longer one that investors should dismiss out of hand, according to a Deutsche Bank note Tuesday.
“The world is facing a dollar confidence crisis as the repercussions of ‘Liberation Day’ continue to reverberate," wrote analysts Marion Laboure, Camilla Siazon and Jim Reid, referring to the label Trump gave his April 2 tariff reveal.
The event “potentially marks the largest shock to the world’s financial and trading system" since the U.S. abandoned the gold standard in 1971, they said, adding, “the U.S.’s exorbitant privilege of being able to comfortably fund its twin [trade and budget] deficits is perhaps the largest consequence of recent events, and may ultimately determine how far the US administration is able to continue this policy."
Write to Ian Salisbury at ian.salisbury@barrons.com
