The US dollar dropped sharply Thursday as the US trade war dented investors’ confidence in US growth prospects.
The US dollar index plunged 2.16% in premarket trading on Thursday, falling to its lowest level since October. This follows a sweeping volley of US tariff announcements on Wednesday, accelerating fear that American growth is at risk.
“Given the dramatic nature of the moves, we are becoming increasingly concerned that the dollar is at risk of a broader confidence crisis,” wrote George Saravelos, head of FX Research at Deutsche Bank.
Why the dollar is dropping
Though the greenback would typically benefit from the inflationary impacts of higher tariffs, the trade war has instead lifted rate-cut expectations amid predictions of weaker economic growth. That’s dampening sentiment around the dollar’s strength.
Saravelos pointed to other reasons as well. In his view, President Donald Trump’s approach to the tariffs has dented American policy credibility, given the massive disconnect between official communications ahead of April 2nd, and the final outcome. Part of the dollar’s global strength stems from trust in Washington’s leadership.
“We worry this risks lowering the policy credibility of the administration on a forward-looking basis. The market may question the extent to which a sufficiently structured planning process for major economic decisions is taking place,” Saravelos said.
Secondly, Saravelos noted that Treasury Secretary Scott Bessent’s emphasis on fiscal tightening soon after the tariff news further undermined US growth expectations, at a time when the rest of the world seems set to increase fiscal support.
Confidence crisis
“Our overall message is that there is a risk that major shifts in capital flow allocations take over from currency fundamentals and that FX moves become disorderly,” the note said. It later added: “We are in the midst of dramatic regime change in markets.”
This is not the first time Saravelos has warned that the dollar is losing its safe-haven properties, previously pointing out a declining correlation between the dollar and risk assets, an unusual outperformance of cheaper currencies, and a US current account deficit of over 4%.
Saravelos said a combined drop in the dollar and US equities, paired with rising term premiums in US Treasuries, is the strongest signal that disinvestment away from the US is accelerating.
The 10-year Treasury cratered on Thursday to its lowest level since October, falling as much as 16 basis points to 4.027%.