The dollar is off to its worst start to a year in more than half a century.
The United States’ currency has weakened more than 10 percent over the past six months when compared with a basket of currencies from the country’s major trading partners. The last time the dollar weakened so much at the start of the year was 1973, when the United States made a seismic shift and ended the linking of the dollar to the price of gold.
This time the seismic event is President Trump’s efforts to remake the world order with an aggressive tariff push and a more isolationist foreign policy.
The combination of Mr. Trump’s trade proposals, inflation worries and rising government debt has weighed on the dollar, which has also been buffeted by slowly sliding confidence in the role of the United States at the center of the global financial system.
That means it is more expensive for Americans to travel abroad and less attractive for foreigners to invest in the United States, sapping demand when the government is trying to borrow more money. On the flip side, the weaker dollar should help U.S. exporters and make imports more expensive, though these typical trade effects are in flux because of the tariff threats.
Even as Mr. Trump has backed down from his most of extreme tariffs and the U.S. stock and bond markets have recovered from their losses earlier in the year, the dollar has continued to slide.
“Having a weak dollar or a strong dollar isn’t the issue,” said Steve Englander, global head of G10 foreign exchange research at Standard Chartered. “The issue is: What is it telling you about how the world sees your policies?”
Initially, the dollar soared on Mr. Trump’s re-election. Much like investors in the stock market, currency players perceived him to be pro-growth and pro-business, likely drawing in investments from around the world and raising demand for the U.S. currency.
Such enthusiasm did not last. After peaking in mid-January, the dollar index began to slide. Hopes of a pro-business administration gave way to lingering worries about stubborn inflation and the impact of already high interest rates on the economy and on companies in the stock market.
Then came Mr. Trump’s unexpected announcement of tariffs that were far, far higher than any economist, investor or analyst had predicted, sending markets — from stocks to bonds to the dollar — into a panic.
Investors worried that the inflationary impact from tariffs could keep interest rates elevated for longer, turning the screws on an economy that was already beginning to show some signs of weakness.
As the administration initially doubled down on tariffs, economic concerns intensified into worries about the safety of U.S. assets at a time of upheaval in global trade. What had begun as anxiety about inflation and the labor market became more acutely centered on the drastic effect that Mr. Trump’s tariffs could have on the entire financial system.
Analysts fretted about a broad shift away from the dollar and U.S. assets more broadly — a change from recent years, when the United States dominated the investment landscape and money poured into American assets. Notably, even after such a weak start to the year, the dollar isn’t that weak historically, because it started from such a high level.
“I think there is a concern that the U.S. that looked exceptional is falling into the pack,” Mr. Englander said.
Higher tariffs most likely mean lower imports, and lower imports mean fewer dollars paid to businesses overseas. That, in turn, could reduce the dollars reinvested back into the United States, in markets like government bonds, both because of the simplicity of avoiding exchanging currencies and because of the confidence investors have in U.S. markets.
The impacts of the dollar’s steep decline are far-reaching.
For some, the weaker dollar has cut into the returns from the once again booming U.S. stock markets. The S&P 500 hit a record high last week, having rallied 24 percent since the administration backed down on much of its initial tariff plan.
But converting the return of the S&P 500 from dollars into euros makes the rally look a lot different, up only 15 percent and still 10 percent away from an all-time high.
For American investors, the weaker dollar can encourage looking outside the United States. The Stoxx 600 index, a broad measure across European stocks, has risen roughly 15 percent over the same period, but converted back into dollars that gain rises to 23 percent. Already, pension funds and endowments, among other investors, have said they are looking more closely at markets outside the United States as a result.
Waning demand for U.S. assets stemming from tariffs has also collided with the government’s plans to increase spending, dashing hopes among some fiscal hawks that Mr. Trump would follow through on his campaign promise of decreasing government spending.
Despite opposition in the Senate, the bill has begun to make its way back through Congress and is estimated to add trillions of dollars to the deficit over a decade.
The government would make up this shortfall by looking to borrow more from investors in the Treasury market, precisely when those same investors have begun to back away, raising concerns about the stability of the market.
Such concerns undercut the role of both Treasuries and the dollar as a haven in periods of stress.
Typically when investors are worried, they seek out assets that they are confident will hold value during periods of turmoil. But worries about the dollar have weakened it further even during volatile trading conditions, suggesting that it is not consistently playing the same haven role for investors at the moment.
“Full-scale de-dollarization, if it ever comes, is still a long way away,” said Rick Rieder, chief investment officer of global fixed income at BlackRock, in the fund manager’s latest quarterly outlook. “But there is one dynamic playing out that could significantly raise that risk: increasing government debt.”
Joe Rennison writes about financial markets, a beat that ranges from chronicling the vagaries of the stock market to explaining the often-inscrutable trading decisions of Wall Street insiders.
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