A market downturn driven by tariffs is causing alarm in the financial sector, affecting not only U.S. stocks and bonds but also the U.S. dollar. Financial analysts are cautioning about a possible global shift away from the dollar, a phenomenon known as “de-dollarization,” triggered by the Trump administration’s unpredictable foreign policy decisions.
George Saravelos, who leads global FX research at Deutsche Bank, noted in a recent report that there is a widespread decline in the value of U.S. assets, including equities, the dollar against alternative foreign reserves, and the bond market. He described the current situation as unprecedented in the global financial system.
Despite the market downturn and rising bond yields, the dollar has dropped to a three-year low this week. Typically, such conditions would lead to increased demand for the dollar as a safe asset, but the current situation, influenced by Trump’s policies, is atypical. Other nations are losing confidence in the U.S. and actively divesting from U.S. assets, which could potentially challenge the dollar’s status as the world’s reserve currency.
This trend poses a significant issue given that the U.S. dollar’s unique role is supported by substantial foreign investment, estimated at nearly $2 trillion annually. International investors, including both private and governmental entities, hold 30% of U.S. debt. Their withdrawal could lead to higher borrowing costs for the U.S., particularly concerning given the nation’s increasing debt levels.
Analysts’ concerns about the volatility would be lessened if there were a clear commitment from the U.S. government to uphold the dollar’s reserve status. However, Stephen Miran, Chair of the White House Council of Economic Advisers, described the dominance of the USD as “costly,” suggesting it makes U.S. labor and goods less competitive.
In response, some investors are seeking stability in assets like gold, German bunds, Swiss francs, and the Japanese yen, according to Gary Schlossberg, global strategist at Wells Fargo Investment Institute. However, Schlossberg advises against completely abandoning faith in the USD, suggesting that the decline in its strength could still be reversed. He points out that despite recent setbacks, the U.S. market remains deeper, more liquid, and more efficient than any other international alternatives. While the euro might seem like a potential substitute, Europe faces fragmentation issues that the U.S. does not.
Schlossberg acknowledges that there is a noticeable shift away from U.S. investments, reflecting market uncertainties. Nonetheless, he asserts that the dollar will continue to be a central currency, as there are limited viable alternatives.
This period of uncertainty is notably different from past financial disruptions, such as the 2011 U.S. Treasury debt downgrade or the 2008 financial crisis, where the dollar maintained its haven status. The current situation is compounded by the Trump administration’s trade policies, which aim to insulate U.S. manufacturing from international markets, contradicting long-standing global agreements.
Trump’s rapidly changing policies, including fluctuating tariffs, contribute to uncertainty. Recent tariffs of 10% generally and 145% on China, introduced by executive order and not formalized by Congress, add to the unpredictability. While these moves can easily be reversed, the erosion of trust in U.S. policies is significant. Analysts suggest that the euro and the yen are benefiting from this shift.
Schlossberg advises investors to consult financial advisors to better understand the evolving market environment. For the time being, he recommends maintaining a diversified portfolio with both U.S. and international investments, considering gold as a safe haven, and increasing cash reserves. He emphasizes that, despite the ongoing turbulence, the situation is not catastrophic and may change swiftly.
Schlossberg remains hopeful that the current market disruptions will eventually subside, indicating the potential for a quick turnaround. This narrative originally appeared on Fortune.com.
