After China announced that it would raise the additional tariffs on U.S. imports from 84% to 125% starting today (April 12), the U.S. dollar faced increased selling pressure on Friday (April 11) during the European session. A report from Deutsche Bank indicated that the pace of global de-dollarization will be faster than the market expects.
On Friday, the Dollar Index dropped to 99.01, the lowest level in nearly three years, and the first time it fell below the critical 100 mark since July 2023, as investors moved away from dollar assets. Notably, the dollar against the Swiss franc hit a 10-year low, dropping 2% on Thursday and further declining to 0.811 francs on Friday after reaching 0.825 francs.
The Swiss National Bank declined to comment on the strength of the franc. Michael Pfister, a foreign exchange analyst at Commerzbank, stated that the Swiss central bank is currently in a difficult position. Although it wants to intervene more in the currency market, it is challenging to do so, and large-scale market entry seems unlikely. On the other hand, the bank does not want the franc to appreciate significantly due to concerns about potential deflationary effects.
The escalation of the China-U.S. trade war has led to increasing market skepticism towards dollar assets, with the dollar falling against other currencies. It dropped 1.7% against the yen to a six-month low of 142.07, and nearly 2.5% against the euro, reaching 1.14 dollars, the lowest since February 2022.
Trump's Policies Intensify Market Panic
George Saravelos, Global Head of FX Research at Deutsche Bank, warned that we are witnessing simultaneous declines in dollar assets, including U.S. stocks, the dollar index, and U.S. bonds, as global markets are de-dollarizing faster than expected. The current situation appears different from past crises, as the market is not hoarding dollar assets but rather selling them off. He noted that actions taken by the Trump administration have driven the market to sell U.S. government bonds.
Saravelos stated that Trump's extreme tariff policies are not merely escalating the trade war; the U.S.-China trade conflict could have severe implications for the global economy and evolve into a full-blown financial war. China now retains the possibility of weaponizing its currency while sending a stronger signal in support of its domestic economy.
Additionally, Saravelos mentioned that the next phase will evolve into a comprehensive financial war involving the dollar assets held by China, including those from the U.S. government and private sector. It's important to note that there will be no winners in a financial war; it harms the interests of dollar asset holders and also negatively affects debtors, making the global economy the ultimate loser.
Rising U.S. Bond Yields and Slowing Economic Prospects
In addition to the dollar being sold off, pressure on U.S. bonds also intensified during the Asian session on Friday. The yield on the 10-year U.S. Treasury rose to 4.45%, marking a weekly increase of 45 basis points, the largest single-week rise since 2001. Kyle Rodda, a senior financial market analyst at Capital.com, stated that the simultaneous decline of the dollar and U.S. bonds is never a good sign, with implications that are more severe than the slowing U.S. economy and uncertain trade prospects.
James Athey, a manager at Marlborough's fixed income department, believes that the economic outlook for the U.S. and the world is more uncertain now than a month ago, as many issues remain unanswered or unresolvable.
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