Continued economic turbulence
for more than 70 years, the US dollar has been considered a financial bedrock and the US Treasury bond a safe haven..
Just over a year before Donald Trump took the oath of office for the second time, the self-avowed anarcho-capitalist Javier Milei was sworn in as President of Argentina. During his presidential campaign, Milei famously used a chainsaw prop to reinforce his message that the “only rational path [for Argentina] is to shrink the size of the state as much as possible. Reducing the size of the State is in itself an act of justice.”
Javier Milei however was elected under far different circumstances than Donald Trump; when Milei was sworn into office in December 2023, the Argentinian peso suffered from chronic hyperinflation, Argentina’s currency reserves were for all intents and purposes barren and the 3rd largest economy in Latin America made foreign investors wary. Though inflation slowed sharply within Milei’s first year in office, the nation’s poverty rate climbed above 50% and the country started to slide into an even deeper recession with rising unemployment.
All of this occurred prior to Trump being inaugurated and Elon Musk brandishing a red chainsaw gifted by Javier Milei at CPAC earlier this year.
When Musk first began toying with the idea of forming a taskforce to downsize the federal workforce during an interview with Trump on X last August, they both talked about the Argentine leader. Musk praised his extreme austerity measures that had laid off tens of thousands of public sector workers and cut pensions to reverse spending that caused the country to default on its debts.
At the time, Trump believed massive reductions in federal government spending coupled with a more robust tariffs policy would invigorate the American economy and Make America Affordable Again. Yet this past week:
Flight from the US dollar
The greenback took a beating this week post-tariffs announcement(s). “The dollar has decoupled from U.S. Treasury yields, which last week rose even as the dollar fell. That has raised speculation that investors are moving investments out of the country as they worry about the longevity and impact of trade levies.”
James Lord, global head of foreign exchange and emerging market strategy at Morgan Stanley, said on Monday “At the beginning of the year, being bullish on the dollar was one of the more popular and consensus trades. That hasn’t worked out very well. I think what’s happening now is reflecting a loss of confidence in the outlook for the U.S. economy, reflecting a huge amount of uncertainty about the outlook for U.S. policy. After a decade of significant inflows into U.S. capital markets, people are looking elsewhere.”
According to the Financial Times, more than 50% of global trade is invoiced in US dollars. And approximately 60% of global reserve holdings are in US dollars as well. So despite the current dollar decline, the “pre-eminent role of the dollar in trade, international finance, and reserve holdings is hard-wired in place by network effects, institutionalised practices, and the lack of viable alternative currencies, and it will take time for them to erode.”
Bond market selloff
Traders are speculating whether international investors will start to sell their US Treasury bonds in reaction to recent US tariffs. Though there is not concrete evidence of such a selloff, Gennadiy Goldberg, head of U.S. rates strategy at TD Securities, told CNBC “Markets are very confidence-driven. Even the perception that foreign investors are trying to step away from Treasury markets can trigger pretty significant panic.”
In an attempt to calm the waters rippling from bond market volatility, US Treasury Secretary Scott Bessent told Yahoo! Finance, “I think if Treasurys hit a certain level or if the Federal Reserve believed that a foreign — I won't call them an adversary — but a foreign rival were weaponizing the US government bond market or attempting to destabilize it for political gain, I am sure that we would do something in conjunction with each other, but we just haven't seen that.”
Meanwhile the junk bond market is frozen. Bob Kricheff, the head of multi-asset credit at investment firm Shenkman Capital Management, told the Financial Times, “Everything has been on hold. Nobody is trying to price a deal in this environment.”
Tariffs-induced domestic turmoil
The Trump administration claims to have received great deals from at least 10 nations, and National Economic Council Director Kevin Hassett asserts America will “100% not” enter a recession this year. Meanwhile, Democrats like Senator Cory Booker of NJ are clamoring for Congressional hearings to investigate possible insider trading at the White House.
California, the largest economy in the United States and 5th largest in the world, is suing the Trump administration to block federal tariffs. Governor Gavin Newsom and Attorney General Rob Bonta “argued tariffs are the responsibility of Congress and alleged Trump invented bogus national emergencies to claim jurisdiction.” Despite the White House’s rejection of these assertions, the California Governor announced “he's looking into his own trade deals with other countries, trying to get California-made products exempt from retaliatory tariffs from other countries.”
And if tariffs are meant to increase domestic supply chains, a recent CNBC supply chain survey is troubling, to say the least. Survey highlights (or lowlights depending on your interpretation): 57% of respondents claim cost is the largest impediment to moving supply chains back to America with the majority citing costs would double or more than double to do so; 21% cite a lack of skilled labor as an obstacle; and only 1 out of 7 respondents claim taxes were the biggest obstacle to developing domestic supply chains; in fact, companies claim moving supply chains to lower-tariffed countries is likely the most cost effective option.
In Argentina this week, the peso dropped 10% against the US dollar as Argentina removed capital controls to seal a $20 billion loan with the International Monetary Fund. Yet despite the drop in the Argentinian peso’s value, the global market seems buoyed by the news of Argentina possibly exiting its decades-long economic crises. Morgan Stanley economist Fernando Sedano said, "we have a positive view of the announced macro framework, which should allow for FX reserve accumulation and more sustained growth." Moreover, U.S. Treasury Secretary Scott Bessent visited Argentina on Monday to further show the Trump administration’s continued support.
So Trump, seemingly undeterred by domestic political and economic turbulence, likely continues to believe his economic policies, like Milei’s, will lead to market confidence and economic growth like “you’ve never seen.”