After another tumultuous week across financial markets, the dollar is on track for one of its worst weeks on record. At this point, the main question for the dollar is no longer what the direct effects of President Trump’s tariffs (many of which were paused on Wednesday) will end up being. Rather, the key questions are around the indirect damage done through generating extreme uncertainty around the policy and economic outlook, the ongoing dislocations in the US Treasury market and, ultimately, undermining confidence in US institutions and asset markets. It is too soon to say what the longer-term effects of the past ten days’ turmoil will be, and there is still time for damage limitation by policymakers. But, in our view, it is no longer hyperbole to say that the dollar’s reserve status and broader dominant role is at least somewhat in question, even if the inertia and network effects that have kept the dollar on top for decades are not going away any time soon and our base case is that it will recover to some degree.
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