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Trump's tariffs dim the safe-haven shine of the dollar

Investors are avoiding the dollar as a safe place to store money during turbulent times. They are worried about tariffs, and their effect on U.S. economic growth.

U.S. president Donald Trump announced on Wednesday far more extensive and larger tariffs against roughly 60 countries. These included massive tariffs against China and its biggest trading partners.

As equity markets trembled over the tariff news, the dollar fell broadly.

Take a look at how the dollar compares to other safe havens.

1/ GREENBACK TAKS BACKSEAT

Dollar has lost its luster as a safe investment option, mainly because of domestic turmoil caused by Trump's tariffs. These have increased the risk of an American recession.

Both the S&P 500 and the dollar have been falling recently. This is a sign that the dollar has not benefited from the safe-haven flow.

Van Luu is the Russell Investments' head of currency strategy and fixed income. He said, "I used to think that the yen, the Swiss franc, and the dollar were the safest currencies. Now I am beginning to change my mind."

The dollar index is down nearly 4% and has had the worst year start since 2016, according to LSEG.

It seems investors are yet to price in recession risk, which is why dollar weakness persists as capital continues to flow out of U.S. investments amid the fading economic exceptionalalism, said Rong Ren Goh. He is a portfolio manager at Eastspring Investments, Singapore's fixed income team.

While Trump's loose economic policies have hurt the dollar's reputation as a safe-haven currency, some investors believe it will eventually regain its appeal as global growth slows.

GOLDEN HISTORY

Gold has been a safe haven asset since before any financial system.

Gold tends to increase in value as investor anxieties rise. The 1970s energy crises, 1980 U.S. economic recession, 2007-08 global financial crash, and the COVID pandemic of 2020 have all seen a rise of the price of gold.

Gold has almost doubled over the last two-and-a half years, reaching all time highs of $3,000 per ounce.

Central banks, retail investors and portfolio managers have all bought gold to protect themselves against inflation spikes that were caused by the COVID crises and the subsequent global energy crisis. They continued to buy gold even when inflation began to ease. With Trump's isolationist policies, many are buying gold to replace the dollar.

FIGHTING BACK

The yen, the Japanese currency, is one of the most popular currencies that benefits from safe-haven flows. It usually performs well during times when stock prices are falling.

The yen had its best day ever against the dollar on Wednesday. It has risen almost 7% this year. Meanwhile, another safe haven, the Swiss Franc, has gained more than 4%.

Justin Onuekwusi is chief investment officer of investment firm St. James's Place. He said, "The yen gains if the S&P index is volatile. That's something we've been more inclined to tilt towards."

4/ GET DEFENSIVE

Stocks are often hard hit by recessions and financial crises. Investors make money by grabbing their cash and running for safety. Most investors cannot give up on the equity market, and so they will tend to buy stocks that are expected to weather recessions well. These include drugmakers, utilities, and food and beverage companies.

Over the past 25 years, defensive stocks, those that are more closely tied to the global economy such as technology and mining stocks, have consistently outperformed cyclical shares.

Even though there is no immediate recession in sight, a global basket of defensive stocks has dropped less since Trump's election victory than a basket cyclicals that had been boosted by expensive tech and AI shares, reflecting investor caution.

5/ BETTING BONDS

For now, renewed tariff anxiety has reduced the pressure on government bonds, which typically benefit from flows to safe-haven assets during times of global stress.

Germany's benchmark Bund yield has dropped from the five-month highs reached last month. This is due to expectations that an increase in German spending would lead to a rise in bond sales.

The 10-year Treasury yields in the United States are set to have their largest weekly decline in five weeks, with yields down by more than 10 basis point on Wednesday alone.

But it's true that not all of this has been driven by a desire for safety. Tariff concerns have also increased recession risks, and the likelihood of further global rate cuts. This is a background that usually benefits bonds.

Eric Clark, portfolio director at Alpha Brands, San Diego, said that he still believes this chaos was created to create panic. The uncertainty is driving yields lower at a time when demand is high for our debt, allowing us refinance $4 trillion to 5 trillion dollars at better rates.

(source: Reuters)