The Dollar and the Bond Market’s Ominous Message for Trump
In the turmoil touched off by a trade war, the U.S. is no longer seen as safe
Greg Ip
April 10, 2025 5:00 am ET
The stock-market meltdown that accompanied President Trump’s intensifying trade war in recent weeks was unsettling enough. The fall in the dollar and rise in bond yields that went with it have been truly ominous. So ominous, it might be why Trump changed course, at least temporarily, by pausing some of his tariffs Wednesday.
Normally when investors are this scared they seek safety, and nothing is safer than the dollar and Treasury debt.
But despite mounting fear of recession, the usual flight to safety hasn’t materialized. That is for several reasons, some relatively superficial, such as inflation risks, and one more fundamental.
In recent years, the U.S. has boasted faster growth, bigger advances in technology, and more-ample supplies of cheap energy than almost any other major economy. Investors worldwide flocked to “American exceptionalism” by buying its assets.
The U.S. is still exceptional, but it is also less predictable, more antagonistic, and more isolated. For foreign investors, that makes it less safe.
The S&P 500 peaked Feb. 19 and then began slipping as Trump rolled out tariffs on Canada, Mexico and China, aluminum and steel, and autos. The selloff gathered force after he slapped “reciprocal” tariffs on almost every country on April 2, and China retaliated. In all the S&P 500 fell 19% through midday Wednesday, just before Trump announced a 90-day pause on the recent “reciprocal” tariffs, except on China. In that time, The Wall Street Journal’s Dollar Index dropped 4.5%.
President Trump signing an executive order at the White House.
President Trump signing an executive order last week adding tariffs to nearly all imported goods. Photo: Abe McNatt/White House/ZUMA Press
Since Feb. 19, Treasury yields are down a bit, but since April 2, they are up about a quarter-percentage point. They rose sharply Tuesday night and Wednesday morning before Trump announced his pause. “People were getting a little queasy,” he admitted.
This behavior is unusual. In the seven prior episodes when the S&P 500 fell as much or more, the dollar rose. In the last episode, from January to June 2022, bond yields did rise, because the Federal Reserve was raising short-term interest rates sharply to combat inflation.
Inflation might be part of the explanation now. Tariffs will hurt demand and economic growth, which would normally prompt the Fed to lower interest rates. But tariffs will also raise inflation, at least temporarily, which makes it harder to justify rate cuts.
Nonetheless, with recession risks rising sharply, traders are now betting the Fed will cut rates this year. So the Fed isn’t the main reason bond yields are up.
Technical factors might be playing a role. Hedge funds might have been forced to liquidate bondholdings after their positions went against them, and dealers have done less to smooth out volatility.
Nonetheless, technical factors can’t explain why bonds and the dollar began behaving strangely weeks ago. The more fundamental explanation is that global investors might be changing how they view the U.S.
Stephen Miran, chairman of the Council of Economic Advisers, after a television interview at the White House.
Steve Miran of the Council of Economic Advisers has said tariffs are a way for countries to share U.S. burdens of providing a defense umbrella and a reserve currency. Photo: Ben Curtis/AP
The dollar has long been the world’s reserve currency. Investors and central banks use dollars to defend their own currencies, pay for imports, repay debt, and for emergencies. Businesses of all nationalities transact across borders in dollars. All that creates an enormous need to hold dollars, which are typically invested in Treasurys.
The dollar’s reserve status makes it artificially strong, which results in exports being more expensive and imports cheaper, contributing to the U.S. trade deficit. In a speech this week Steve Miran, chairman of Trump’s Council of Economic Advisers, said other countries should share the U.S.’s burden of providing its defense umbrella and a reserve currency. One way, he said, was by paying tariffs.
Before joining the administration, Miran had, in a report, suggested other countries could help hold down the dollar through a “Mar-a-Lago” accord, and if they didn’t, the U.S. could impose a fee on their holdings of Treasurys. In an email Wednesday, Miran said that he wasn’t advocating either idea then, and that the administration isn’t considering either now. “The United States’ status as the provider of reserve assets is one of our greatest economic strengths and the President has been extremely clear that he will act forcefully to preserve it and vigorously oppose attempts to undermine it,” he said.
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Still, investors might be reluctant to rule out such possibilities given how aggressively Trump has stretched existing laws to hit everyone with steep tariffs.
Jason Thomas, head of global research at Carlyle Group, noted that since early 2022, gold has strongly outperformed inflation-protected Treasurys, suggesting that gold is now the world’s preferred safe-haven asset.
Thomas said that after Russia invaded Ukraine, the U.S. and its allies froze the Russian central bank’s foreign-exchange reserves. In recent months, Trump’s policies suggest the U.S. will play a less central role in global trade, making the dollar less important for invoicing exports and imports, he added. As a result, Thomas said, “The global community and central bank reserve managers are just a bit more hesitant when it comes to adding to Treasury exposure.”
For Trump, this has one indirect benefit: It ensures a stronger dollar doesn’t cancel out the effect of his tariffs on trade.
But it carries a cost: Less demand for dollar assets makes it harder to finance the U.S.’s massive borrowing.
Now, if the trade deficit falls, the U.S. won’t have to sell as many assets to foreigners to finance that deficit.
And yet it would still be at the mercy of such investors. As of last June, foreigners held $7 trillion of Treasury bonds (half by official investors such as central banks). That is about a third of the total held by the public. The federal budget deficit is running at around $2 trillion a year, or 7% of gross domestic product, and Senate Republicans just passed a budget resolution that would continue outsize deficits for the foreseeable future.
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So the U.S. needs foreigners to keep rolling over the bonds they hold, and buying new ones. Even a small pullback would cause yields to jump. Jay Barry, head of global rates strategy at JPMorgan Chase, estimates that yields rise a third of percentage point for each $300 billion decline in foreign official holdings of Treasurys.
There were recent fears that China might try to retaliate against Trump’s tariffs by selling some of its own bondholdings. There is no evidence that it has, but the possibility has highlighted the risks to the U.S. of a trade war morphing into financial war.
In 2022, the U.K.’s new prime minister, Liz Truss, proposed a steep tax cut. British bond yields immediately skyrocketed, the tax cut was withdrawn, and Truss resigned. The dollar’s reserve status was long assumed to insulate the U.S. from such a fate. Events of the past few weeks suggest Trump shouldn’t take that for granted.
