Dollar movements spark ‘Trussonomics’ fears with worst case scenario ‘no longer unthinkable’
The dollar’s worst case scenario is “no longer unthinkable,” economists have warned, as some draw parallels with the crisis in UK financial markets during the Liz Truss premiership.
Alongside plummeting stocks and falling bond prices, the US currency has weakened in the wake of Trump’s erratic tariff agenda, with growing concerns that its status as the world’s reserve currency is under threat.
The DXY index, which tracks the dollar’s value against a basket of currencies, fell to its lowest in three years during Monday trading.
Since Trump’s ‘Liberation Day’ levies the index has slumped over four per cent and economists have raised the alarm on long term consequences.
Jonas Goltermann, deputy chief markets economist at Capital Economics, said: “Extreme outcomes, such as reserve managers dumping Treasuries, the dollar losing some, or all, of its special status…, are no longer unthinkable.
Golterman said it was “hard to see” the dollar scraping back losses without a reduction in US policy uncertainty.
He added: “It is becoming increasingly obvious that the Trump administration’s policy approach is in some ways undermining the trust in US institutions that underpins the dollar’s global role.”
Dollar’s movement is ‘unusual for a major currency’
Global markets tumbled after Trump’s tariff onslaught. The FTSE 100 fell to a 13-month low last week.
New York’s tech-heavy Nasdaq lost a record 1,050 points the day following Trump’s speech. Meanwhile, Hong Kong’s Hang Seng index fell by 13.22 per cent – its worst one day loss this century.
Germany’s Dax and Cac 40 ended post ‘Liberation Day’ trading on losses above four per cent.
The fallout saw the dollar stop following differences in long-term bond yields and short-term interest rates – two benchmark influences for the currency.
As investors flocked away from the dollar, geopolitical tensions began to drive its movement.
Goltermann said this was “even more unusual for a major currency, and is reminiscent of what happened to sterling during the Trussonomics debacle in Autumn 2022.”
After the Truss’s Chancellor Kwasi Kwarteng delivered his mini-budget, the pounds crashed whilst bond yields soared – a pattern similar to the ‘Liberation Day’ aftermath.
Dollar bound to trade war
The intensifying China and US trade war has been a key driver of the currency’s downturn.
Trump has slapped a 145 per cent duty on imports from China, which responded with a 125 per cent levy.
The US is unlikely to make immediate substitutes for many of the goods it buys from China, which will ramp up inflationary risks.
Goltermann said: “The dollar’s drop against other major currencies in recent weeks means that, in trade-weighted terms, China’s currency has weakened, which will to some extent help to offset the impact of US tariffs.
“But so long as China’s exports to the US continue to face a tariff rate above 100 per cent, that will be of little help.”
Despite this, Capital Economics’ base case expects the US economy to avoid an outright recession.
It predicts the Fed will maintain steady interest rates, which will support the dollar. The economists also projected easing of bond market disclosures.
This outcome would likely “ease some of the incipient US risk premium” and help the dollar and US treasuries bounce back in coming months.
Financial markets would also benefit from a general easing of tensions.
But, Goltermann said “recent developments are genuinely extraordinary and could play out in a number of ways, many of which would be less benign.”