Recent events have left financial experts predicting a tariff-induced meltdown of U.S. equity and bond markets. These predictions have left many worried, as not only stocks and Treasuries have been affected, but the U.S. dollar has also been experiencing a decline. Analysts are warning of a possible global “de-dollarization” in response to the Trump administration’s foreign policy decisions.
“George Saravelos, global head of FX research at Deutsche Bank, stated this week that, “We are witnessing a simultaneous collapse in the price of all U.S. assets including equities, the dollar versus alternative reserve [foreign exchange] and the bond market. We are entering uncharted territory in the global financial system.”
Despite the decline of markets and the rise in bond yields, the dollar has reached a three-year low this week. In a more stable environment, markets would typically be “hoarding” dollars as a safe haven from the other noise, says Saravelos, which would result in the strengthening of the dollar. However, the current situation is far from typical. Countries are now losing faith in the U.S. and actively selling U.S. assets, which could potentially disrupt the dollar’s global reserve status.
The Implications
The implications of this could be concerning. Foreigners invest nearly $2 trillion in the U.S. every year and own 30% of U.S. debt. Seeing them leave could lead to increased borrowing costs for the U.S., especially at a time when the national debt is increasing.
Analysts would be less concerned if the U.S. government was committed to maintaining the dollar’s reserve status. However, Stephen Miran, chair of the White House Council of Economic Advisers, recently stated that the primacy of USD is “costly,” alleging it makes U.S. labor and products uncompetitive.
So, where does this leave investors? Some are seeking reassurance in assets like gold, German bunds, Swiss francs, and the Japanese yen, says Gary Schlossberg, global strategist at Wells Fargo Investment Institute.
What’s Next?
However, Schlossberg assures that it isn’t time to completely lose faith in the USD. He suggests that the current erosion in its strength can still be reversed. Despite the considerable damage done over the past few months, the U.S. market is still deeper, more liquid, more developed, and more efficient than any other.
Despite the current situation, Schlossberg and other analysts note that the current market environment is substantially different from previous shocks. The Trump administration’s tariff policies and the intent to separate U.S. manufacturing from other countries is a new challenge, disrupting decades of established rules and threatening the U.S.’s role as the world’s leader.
Schlossberg advises jittery investors to consult with a financial advisor and to diversify their holdings to include both U.S. and international exposure. He also suggests considering gold as a safe haven and increasing cash allocation for the time being.
“Optimistically you can say, this too shall pass, the turbulence that’s been created. It’s not Armageddon tomorrow,” says Schlossberg. “I mean, this may reverse on Monday.”
This story was originally featured on Fortune.com
