President Trump's trade crisis is forcing investors to contemplate what was previously unthinkable: the end of the era of the strong dollar.
The rising U.S. currency has been a crucial, if little-known, factor in global investor behavior since the financial crisis. Investors from around the world flocked to U.S. markets, seeking the rally in the U.S. technology sector and rising yields on U.S. debt. The dollar's position as a safe-haven asset, which strengthened as risk assets such as stocks fell, cemented its appeal to foreign investors.
Thursday's simultaneous selloff in the dollar and U.S. stocks suggested that confidence in the greenback has been shaken and raised concerns about whether it has lost its appeal as a hedge against market turbulence.
In the past four decades, there have been only five other days when a more than 4% selloff in the S&P 500 was accompanied by a 1% drop in the dollar, according to LSEG data.
"This is surprisingly unusual," said Florian Ielpo, head of macroeconomics at Lombard Odier Investment Managers in Geneva. "The dollar's power as a safe haven has been reduced at the moment."
The drop also suggests that foreign investors are selling stocks and taking the money home. The sheer volume of foreign investments in the U.S.-they held more than $30 trillion in stocks and bonds at the end of 2024-may exacerbate U.S. market fluctuations if they rush out.
"That's a huge amount of assets coming out of the U.S., even if they're making minor adjustments," said Brad Bechtel, global head of foreign exchange at Jefferies.
The dollar's slide has hit foreign investors hard all year, many of whom have not fully hedged their currency exposure. The S&P 500 is down 8.25% this year. However, a Swedish investor who bought an S&P 500 fund has lost nearly 20% due to the dollar's depreciation against the krona. A Japanese investor has lost about 15%, according to FactSet.
The wave of selling is rekindling doubts about whether the dollar can maintain its role as a major currency in global trade and finance. Demand for U.S. Treasuries from global central banks and private investors is the basis for the dollar's reserve status. There is no indication that foreign investor nervousness in the U.S. has spread to Treasuries, whose price soared this week amid the flight to safety.
Foreign bondholders are also less likely than stock investors to repatriate their money, according to analysts at UBS, as most would have to sell at a steep loss after the sudden rise in yields in recent years. There are other reasons to be wary of the falling dollar narrative: Trump could cut tariffs, or investor enthusiasm for a possible European economic recovery could fade.
"People are a little overvalued. Market confidence fluctuates considerably," Bechtel said. "We're priced for ideal European growth, and I don't think the perfect U.S. downturn is going to happen."
This article is part of live coverage from the Wall Street Journal. You can find the full broadcast by searching for P/WSJL (WSJ Live Coverage).
Chelsey Dulaney, TradingView