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Fund managers have expressed concerns that the US dollar’s reputation as a safe haven for global capital may be jeopardized due to erratic policy decisions and increasing trade barriers. On Friday, the dollar dropped to a three-year low against the euro, continuing a decline initiated the previous week following President Donald Trump’s announcement of significant "reciprocal" tariffs on US trading partners.
This situation has unsettled investors, who caution that a potential "tectonic shift" in the global economy could occur if the dollar is no longer a reliable refuge during periods of market instability. Bob Michele, Chief Investment Officer of JPMorgan Asset Management, which manages $3.6 trillion, commented that there is a strong argument for the conclusion of American dollar exceptionalism.
For decades, the stability of the US economy has allowed the dollar to serve as the world’s reserve currency, held by central banks worldwide. This status has enabled low-cost borrowing for the US, helping finance the country’s current account and government budget deficits.
However, a recent simultaneous sell-off in equities, bonds, and the dollar, instigated by the president’s assertive trade measures, signals a waning confidence in US assets among international investors, according to money managers. Bert Flossbach, Co-founder and CIO of Flossbach von Storch, indicated that President Trump’s erratic tariff policy undermines the US’s standing as a safe haven.
Brad Setser, a fellow at the Council on Foreign Relations, noted that heightened policy uncertainty in the US might lead to changes in the dollar’s role in the global economy. Edward Fishman, author of Chokepoints on US economic warfare, suggested that the president’s tariffs, along with threats to the rule of law and Fed independence, might also be diminishing the dollar’s appeal. Over time, Fishman predicts this could shift towards a more "multi-polar" world where currencies like the euro assume larger roles.
The current dollar decline is notable because market stress typically boosts the currency, as investors move to dollar-denominated assets like US Treasury bonds, traditionally viewed as safe havens. While economists note that the currency of a country imposing import duties generally strengthens, Mike Riddell, a fixed income portfolio manager at Fidelity International, described the recent rise in long-term government bond yields, coupled with a weaker dollar, as resembling "capital flight."
Despite this, economic advisers to President Trump have previously highlighted the disadvantages of a strong dollar. Stephen Miran, chair of Trump’s Council of Economic Advisers, argued that the dollar’s status as a world reserve currency had inflated its value, affecting the competitiveness of US manufacturing globally. Economists dispute Miran’s argument, expressing concerns that this could prompt the Trump administration to further devalue the dollar. Michael Krautzberger, Global CIO of Fixed Income at Allianz Global Investors, remarked on the escalating conflict, questioning what future steps might be taken.
