Why are the US dollar and treasury bond prices in downtrend?

After all the uncertainty created by President Trump’s ‘liberation day’ tariffs on 2 April, the world is now in a slightly more certain place, albeit with tariff levels not far off those announced in early April. This is a hugely backward step for the global economy – and countries across the G10 can’t hope to grow by much more than 1% both this year and next. That’s poor, compared to the average 2-2.5% range that we’ve seen in the last few years.

In short, much of the aid to growth that central banks had hoped to deliver, through reducing interest rates in the past year or more, has been undone by tariff-related uncertainty. And, while some of this uncertainty has lifted, countries have now got to live with tariffs that generally look as if they will be 15%, or more, on a countrywide basis, with higher tariffs on certain products such as autos, steel and pharmaceuticals. This has all been done by the Trump administration to ‘make America great again’ but, so far, it has made it worse.

Stagflation pressure haunts the US, and other countries around the world will have to find ways to cope with negative growth pressures. There’s not going to be a fightback against US tariffs, and the scope and speed of new trade arrangements between countries outside of the US will probably be too limited and too slow to avoid the near-term damage done by US tariffs.

The weak growth and lower-inflation backdrop in countries outside the US suggests that monetary policy easing will continue, even for those that hint they might have stopped, like the ECB. These countries have plenty of justification to lower policy rates. The justification for the Fed easing that the market anticipates is trickier, for two reasons. The first is that tariffs will increase inflation pressure, not lower it, and the second is that rate cuts will undoubtedly be put down to political pressure from President Trump, even if that’s not the truth.

Steven Barrow, Head of Standard Bank G10 Strategy, said that would not be a good backdrop for US assets such as treasuries and the US dollar. Of course, US assets, particularly the US dollar and equities, have already significantly underperformed other equity markets and other currencies so far this year. But rather than being a function of the economic effects of the US’s egregious tariff policy, this capitulation seemed to owe more to the rapid unwinding of excessively long investor positioning in the dollar and equities. Much of this positioning appears to have been based on the idea that US exceptionalism would continue, both in terms of economic and financial market outperformance.

Looking ahead, many analysts sense that global investors will not just continue to cover unhedged long-dollar positions that have been used to fund asset positions – but will also fundamentally reassess the amount of assets that should be put to work in the US. In purchasing power parity terms, the US is around 15% of global GDP but its equity markets account for more than a half of global stock capitalisation. That seems somewhat unbalanced, in Steven Barrow’s view, just as this shrinking share of global GDP questions the wisdom of the dollar continuing to dominate global finance. In the coming months, and years, some of these imbalances could correct, not least through the US dollar losing value.

One important question is whether the US’s increased inward focus will diminish its influence over other economies and other financial markets. The fact that the surge in tariff-generated risk aversion this year saw the US dollar and treasury prices fall, not rise as they usually do when risk aversion increases, attests to US influence over the global financial landscape diminishing. This might be a strange thing to say given that markets have been 100% focused on every utterance from the US president. But while the US noise level might be high, the financial market fallout outside of the US has not been as bad as we might have expected from past experience.

“The US influence is waning, not increasing. This gives some hope that, even if US noise levels remain high, it won’t stop many assets outside of the US, particularly bonds and currencies, from posting solid gains”, said Steven Barrow.