Despite market calmness amidst Donald Trump's tariff threats and Elon Musk's influence in government, concerns are rising about the US dollar's dominance. A decline in demand for US Treasury bonds, particularly from foreign reserve managers, hints at potential challenges to this status.
Markets are giving Donald Trump a pass, a thumbs-up, even. His on-off tariff threats against strategic friends and neighbours this week did unsettle stocks and fluff up the dollar, but investors largely held their nerve. Perhaps they are waiting to see if his action matches his words. Much of the alarm had dissipated even before Trump agreed to delays with Mexico and Canada. This is not the only scene of radical uncertainty that investors are choosing to ignore.
Drawing on weekly data from the New York Fed, which covers around two-thirds of these holdings, they note a reduction in reserves after election day, to the tune of about $78bn from election day to January 8, only around a third of which has returned since. This may, they wrote, “reflect waning foreign official demand for dollar-denominated safe assets, possibly driven by geopolitical concerns including fear of sanctions and asset freezes”.
RESERVE CURRENCY US TREASURIES TARIFFS MARKET STABILITY POLITICAL UNCERTAINTY
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