THE Trump Shock was short and sharp, and now it’s over.
That may seem an infeasible judgement after one of US President Donald Trump’s worst weeks in a while.
Electorates in several states sent the president a brickbat to celebrate his election anniversary, while the Supreme Court looks likely to administer a major rebuff on his signature issue of trade tariffs.
But for markets, and crucially the dollar, the immense shocks he’s administered since returning to power are already in the past.
George Saravelos, who heads foreign exchange research at Deutsche Bank AG, points out that the volatility of both the dollar and US bonds – the amount that investors are willing to pay to protect against future fluctuations – is much lower than a year ago, despite their massive spike after the Liberation Day tariffs were announced in April:
The market is saying the “Trump shock” is over: The trade war is “solved”; fiscal policy is on autopilot (bar the Supreme Court decision on tariffs); the Middle East (for example energy prices) is more stable and US-China risks are on ice for at least a year.
The key isn’t so much the level of the dollar, which remains lower than 12 months ago (in line with an administration aim to improve competitiveness), as the way it’s behaving.
At the worst of the shock in April, the currency tanked even as investors pulled out of Treasury bonds, pushing up their yields.
That’s the dynamic for emerging markets during crises when they lose international confidence.
It was alarming to see for the world’s reserve currency. That’s now a distant memory.
The dollar is behaving exactly as might be expected, rising when people are risk-averse because it offers a safe haven, and when higher bond yields give investors a reason to send money to the United States.
“It’s not been as people thought,” says Jean Ergas of Tigress Financial Partners.
“Companies have dealt with it fairly well. There’s the wealth effect in the United States to help.
“And the dollar has ceased to be an emerging market currency.
“When people move into cash, their cash allocation will be to the dollar.”
Earlier in the year, as Trump made clear that he was bent on a far more radical interruption of global norms and institutions than in his first term, the dominant narrative was of “de-dollarisation”.
This was seen as an inevitable retreat of capital from the United States, where the immense buildup in tech shares had left many foreign investors feeling overexposed.
Now, the old narrative has returned: American exceptionalism, despite everything.
As Saravelos says, the global fiscal environment is expansionary (spectacularly in Germany), monetary policy is easing, and the US economy has proved far more resilient than expected.
Central to this have been tariffs (not as bad as feared) and artificial intelligence (even better, so far, than backers’ wildest dreams).
Tariffs galore
Most important, the trade war has not yet had the dire effects anticipated, though tariffs largely remain at much the same level that prompted April’s turmoil.
Most of the rest of the world declined to retaliate, and instead opted to conciliate Trump, contrary to the demands of game theory.
Also, tariffs had a dramatic impact on US government receipts, with monthly tariff revenue hitting US$30bil in October.
It was running at US$5bil at the turn of the year.
This eases deficit concerns a little and gives the levies a sense of permanency; they’re achieving something.
Companies are warning of trouble ahead, even if in anonymised form that won’t arouse presidential ire. In the Institute for Supply Management’s survey for October, executives offered a litany of complaints, all about tariffs.
“The unpredictability continues to cause havoc and uncertainty on future pricing/cost,” grumbled one computer maker. — Bloomberg
John Authers is senior editor for markets and a Bloomberg Opinion columnist. The views expressed here are the writer’s own.
