Weaker USD and the “fire sale” in UST’s is placing the focus back on the role of USD as the global reserve currency. Since the closing level on 2nd April, the S&P 500 is down 6%, the 30-year UST bond is 37bps higher and the US dollar (DXY Index) is down 3.7%. The DXY index has now fallen below the lows from 2023 and 2024 and we are back at levels not seen since May 2022 after Russia’s invasion of Ukraine. The US dollar has also completely detached from rate spreads underlining the crisis of confidence feel to US dollar moves. Trump’s reciprocal tariff announcement may have generated a sea change in attitudes towards US assets. Recent events may tarnish the USD for an extended period. Non-US holders of USD assets may just want to get out and stay out. Investors may see the large US tariff moves as pointing to similar moves on international financial arrangements. If tariff policy can be dictated by one side and enforced by economic threats, what is to stop analogous policy decisions on bonds and other US assets held by non-US residents? The outcome may be an increase in risk premia on a broad range of US assets. Hence neither the 10yr USTs nor the DXY are any more safe haven destinations. In fact, in both risk on & risk off globally, both DXY and long end US bond yields might suffer. This is a cataclysmic shift in risk assets pricing. There are now only two destinations left for large capital flows in risk off: EGBs (European Government Bonds) and Japanese bonds. Gold too will be most sought after when ever risk off further gathers pace. It will be a long time before USD & USTs get back their safe haven status.
