Source: Barron Chinese

In the past, when the U.S. imposed tariffs on trading partners, the dollar usually strengthened. One of the reasons for this weakening may be that the dollar is losing its safe-haven asset status.

After the new round of tariffs by the United States against Canada, Mexico and other countries came into effect, global stock markets generally fell on Tuesday (March 4), but some analysts pointed out that what makes people feel even more unsettling is the reaction of the US dollar.

When the U.S. imposed tariffs on trading partners in the past, the dollar usually strengthened. Stephen Miran, chairman of the White House Economic Advisory Council nominated by Trump, once said that the imposition of tariffs during Trump's first term was one of the reasons for the weakening of the yuan, which in turn offset the impact of tariffs on U.S. consumer prices.

The US dollar rose after the 2024 U.S. presidential election, one of the reasons is the expectation of the dollar appreciation brought by Trump's tariff plan. Some analysts now believe that the weakening of the dollar so far this week should be aroused vigilance.

Lily Francus, chief investment officer of Novi Loren and former head of quantitative strategy at Moody's, posted on social media earlier this year: "It is not scary to rise due to tariff-related news, but the scary thing is that the US dollar has fallen due to tariff-related news." Francus recently shared her article again on social media X.

George Saravelos, global head of foreign exchange research at Deutsche Bank, pointed out that the dollar's downward response may be for several reasons, and he believes one of the reasons is particularly disturbing: the dollar may be losing its position as a safe-haven asset.

Source: FactSet; Delivanbang

Salavelos commented: "Sometimes investors can ignore some reactions made by the market, but this time the situation is different."

There are other reasons for the decline of the US dollar, such as the flow of funds from the US stock market and to the European stock market and stock markets, which may weaken investors' demand for the US dollar.

In addition, according to recent data, the U.S. current account deficit accounted for more than 4% of GDP at the end of last year. Salavelos said that in the past, when this proportion reached such extreme levels, it was exactly the peak of the US dollar's overvalued period.

Salavelos, however, tried to highlight some reasons why he believes the dollar is falling because it is losing its safe-haven position.

Salavelos said that the long-term negative correlation between the US dollar and risky assets such as the US stock market has been broken, and the two have experienced a synchronous decline. In addition, the dollar weakened against both high and low beta currencies, which is another sign of pressure on the dollar.

This expectation of increased defense spending boosts the euro/dollar, another original reason for the weakening of the dollarBecause this expectation supports Eurobond yields, a key driver of exchange rate trends.

This expectation of an increase in European defense budget pushed European defense stocks to record highs on Monday. But foreign exchange strategists at Dutch International pointed out that they are skeptical about the recent euro's rise.

A potential consequence of the recent weakness of the US dollar is that the impact of Trump's tariffs on U.S. inflation may be amplified.

On Tuesday, the US dollar fell against the Canadian dollar and weakened against the euro and the yuan. Meanwhile, the dollar continued to climb against the Mexican peso.

FactSet data shows that the U.S. dollar index, which measures the exchange rate changes between the U.S. dollar against a basket of major currencies, fell 0.5% on Monday to 106, the lowest level since December.