In the past week, the U.S. dollar has shifted from being a reliable safe haven to a source of concern for investors. This change follows President Donald Trump’s implementation of tariffs that affect both allies and adversaries, creating unrest in the global market.
The immediate impact was felt in the Treasury market, where borrowing costs surged, marking the largest weekly increase since 1982 due to a significant exodus of offshore funds. Ray Attrill, head of FX strategy at National Australia Bank, noted that the U.S. seems to have rapidly lost its status as a safe harbor for investments.
He pointed out a noticeable decline in confidence towards the U.S. economy, particularly as trade tensions escalate. The dollar has already faced challenges in 2023 and on Friday, it fell to a decade-low against the Swiss franc and to its weakest level against the euro in over three years.
Historically, the dollar’s strength as a reserve currency has been supported by international agreements like the Bretton Woods system established in 1944. This system provided a foundation for stable exchange rates and robust international trade.
However, recent tariff policies have disrupted this stability, leading to global market instability and a massive loss in market value. Economists are concerned that the U.S.’s international reputation is damaged, as highlighted by Richard Yetsenga, the ANZ chief economist.
The global economy is now more vulnerable than before the tariffs were imposed. Martin Whetton from Westpac pointed to severe fluctuations in U.S. dollar swap spreads and rising Treasury yields as indicators of reduced confidence in U.S. financial safety.
The situation has deteriorated to the extent that the U.S. now pays more to attract investors than countries like Italy, Spain, or Greece. Despite some predictions that the dollar may recover, any long-term decline in its status can have detrimental effects on investors and could lead to prolonged higher interest rates amidst persistent inflation pressures.