Dollar Continues to Fall, Stocks Rise, Volatility Extremes, Growth Uncertainty, and Worsening Returns
The US stock market has been on the rise, with volatility maximizing as the dollar continues to fall, and inflation risks have resurfaced amid uncertain economic growth, and Korea has become more anxious due to the sharp rise in the stock market amid the instability of the won's value, which relies on the dollar's decline.
In the Trump administration's 'temporary 90-day grace period after tariff threat' strategy, stocks that relied on the dollar's decline initially led to a rise in the stock market in Korea, and volatility increased, making it the area with the greatest risk.
The dollar continues to fall despite the fact that President Trump has retreated from the most extreme tariff attack of the year, and the US stock and bond markets have almost recovered from their losses at the beginning of the year.
The US stock market saw the S&P 500 futures show weakness in the early opening hours of the 1st, but the benchmark index of technology stocks continued its winning streak following its rise the previous day.
The US dollar has been hit by the volatility of the 'US sell' trade triggered by President Trump's trade war, leading to its worst situation in half a century.
The New York Times reported on the 30th of last month that “the dollar is having its worst start to the year in half a century,” and that “the U.S. currency has weakened by more than 10% compared to a basket of currencies of the U.S.’s major trading partners over the past six months.”
The dollar’s worst weakness has been a feature of the Trump administration since the beginning of this year, and the NYT diagnosed that this is the first time since the U.S. ended the link between the dollar and gold prices in 1973.
President Trump has intensified his attacks on the Federal Reserve and Fed Chairman Jay Powell by pressuring them to “lower interest rates,” and Chairman Powell has responded by saying, “There were no tariffs and we would have cut interest rates this year.”
Trump’s tariffs were approached through negotiations with the European Union, but Japan, the largest trading partner, has become embroiled in a dispute over “political self-determination” over “rice,” and uncertainty has arisen again.
The US S&P 500 index has risen more than 5% this year, but uncertainty over tariffs has made investors nervous, and anxiety has grown over the Trump Republican Party’s biggest conservative agenda, the tax cut bill.
The New York Times cited three factors weighing on investors’ minds: “growth uncertainty,” “recurring inflation risks,” and “a sharp reversal if the trend breaks.”
The uncertainty over US economic growth is due to economists pointing out “signs of a decline in consumer spending” in the first quarter’s GDP decline.
The consumer crisis hinges on whether low-income households will be able to benefit from the Republican tax cut bill.
The New York Times reported that “many economists think the bill will boost growth, but the Yale Budget Institute warns that the bill is so expensive that it could raise interest rates in the long term.”
Conquering inflation is a bigger challenge, and Trump’s tariffs have not yet directly affected price increases.
The New York Times said, “But this can change quickly, especially after a key deadline next week when Trump could reimpose the largest tariffs yet.” U.S. stocks rebounded on expectations that a series of trade deals would follow under the Trump administration that would avoid the tough tariffs since late April, and investors were ahead of the administration-led economic growth situation with President Trump’s hard-line message of “90 deals in 90 days,” and the brakes were applied on trade talks with Japan.
“The U.S. economy has relied on the strength of its underlying economy, and so far, despite all the turmoil in the second quarter, one factor that has supported markets has been largely resilient data,” Deutsche Bank market strategist Henry Allen said in an investor note on the 1st. “There has been little evidence that the U.S. or global economy is suddenly worsening because of tariffs.”
“If this trend breaks, all bets are off,” the New York Times said. “This seismic event is President Trump’s attempt to reorganize the world order with aggressive tariff hikes and an isolationist foreign policy.” The US dollar has been weighed down since the beginning of the year by a combination of President Trump’s trade proposals, inflation concerns, and rising government debt, and the dollar has also been hit by a gradual decline in confidence in the US role at the center of the global financial system.
“Even if we do see full de-dollarization, we still have a long way to go,” said Rick Rieder, BlackRock’s global fixed income chief investment officer, in the fund manager’s latest quarterly outlook. “However, there is one dynamic at work that could significantly increase that risk, and that is the rise in government debt,” he warned, warning of the risk of a continued dollar decline due to rising debt.
“It’s not a question of a weak or strong dollar,” Steve Englander, global head of G10 foreign exchange research at Standard Chartered, told the Times. “It’s a question of what it says about how the world sees your policies.” The dollar initially surged on Trump’s reelection.
“Like investors in the stock market, currency managers saw Trump as a growth and business advocate, which attracted investment and boosted demand for U.S. currency around the world,” the Times said. “That enthusiasm was short-lived, and after peaking in mid-January, the dollar index began to decline.”
The market’s hopes for a “pro-business administration” under Trump have given way to “ongoing concerns” about the impact of persistent inflation and already high interest rates on businesses in the economy and stock markets.
The New York Times reported that “as concerns grew, President Trump unexpectedly announced tariffs that were much higher than economists, investors and analysts had anticipated, sending markets panicking from stocks to bonds to the dollar,” and that “investors feared that the inflationary impact of the tariffs could push interest rates higher for longer, putting pressure on an economy that was already showing some signs of weakness.”
As the administration initially doubled its tariffs, economic concerns shifted to concerns about the “safety of American assets” amid the global trade turmoil, and what had initially been concerns about inflation and labor market concerns became more acutely focused on the “rapid impact that Trump’s tariffs would have on the entire financial system,” according to the New York Times financial reporter.
Analysts were concerned that the dollar and American assets were losing credibility more broadly, a change from recent years when the U.S. dominated the investment environment and money poured into American assets.
The weakness of the US dollar early this year started from the strength of the US dollar and was not historically diagnosed as a ‘bearish trend’, but now the weakness has become clear as a continuous decline and an extreme contrast to the stock market rise.
The New York Times explained the correlation between tariffs and the dollar decline, saying, “Higher tariffs likely mean fewer imports, and lower imports mean fewer dollars paid to foreign companies,” and “This could ultimately reduce the dollars reinvested in markets such as Treasury bonds, which is due to the simplicity of avoiding currency exchange and the confidence of investors in the US market.”
The recent dollar decline has had far-reaching effects.
The last time the US dollar experienced such a steep decline was in 1973, when foreign currencies were not linked to the dollar, but now it is linked to all international markets and currencies, and the Chinese yuan and Japanese yen are particularly threatening.
The dollar decline occurred two years after President Nixon decided to no longer link the dollar to gold in the system of transferring the leadership of international trade as an international currency, and was limited.
The New York Times said, “The weak dollar has once again dented the performance of the booming U.S. stock market this year,” and “Although the S&P 500 index rose 24% from its record high last week after the administration backed off much of its initial tariff plan, the actual S&P 500 rally in euros from dollars was only 15%, a complete departure from its all-time high.”
Under Trump, U.S. investors have been able to shift their investments outside the U.S. due to the weak dollar, and the Stoxx 600 index, a broad measure of European stocks, has risen about 15% over the same period, but has risen 23% in dollars.
“Pension funds and endowments, among other investors, are already watching markets outside the United States more closely as a result,” the New York Times reported. “The reduced demand for U.S. assets due to tariffs also clashes with the administration’s spending plans and dashes the hopes of some fiscal hawks that President Trump will fulfill his campaign promise to cut government spending.”
The Trump Republican tax cut bill is estimated to add trillions of dollars to the deficit over a decade, and the administration has been looking to borrow more money from investors in the Treasury market to make up for the shortfall.
Now, those same investors are beginning to withdraw from the bond market, raising concerns about market stability.
The biggest concern is that Treasuries and the dollar are weakening their role as a safe haven in times of stress, and while ordinary retail investors worry, institutional investors look to bonds as an asset that they are confident will “hold its value in times of turmoil.”
But concerns about the dollar have “further weakened the dollar in volatile trading conditions,” and government debt has grown. “This suggests that it is not currently serving as a safe haven for investors on an ongoing basis,” the Times said.
South Korea's inflation rate increased by 0.3%p from 1.9% in May to 2.2% in the consumer price index in June, and the consumer price index increased by 0.2%p from 2.3% in May to 2.5% in June, showing an upward trend again.
In a survey conducted on U.S. consumers in June, consulting firm McKinsey & Company listed inflation (43%) and tariff policy (29%) as the most concerning issues.
Sixty-six percent of respondents expected that tariff increases would lead to higher consumer prices, and a significant number of U.S. consumers saw the biggest increase in the price of automobiles and auto parts.
Trump told reporters on Air Force One that “we’ve made a deal with Japan. I’m not sure we can make a deal. I doubt it,” and that Japan is refusing to accept American rice, which Washington described as an “easy call,” and that it sells millions of cars in the United States.
Reuters reported on the 1st that “Trump said he has no intention of extending the July 9 deadline and will send letters to countries informing them of the tariff rates they will face,” and that “Trump suggested he could impose a 30% or 35% tariff on Japanese imports, far exceeding the 24% he announced on April 2 and suspended until July 9.”
Reuters continued that “the only country that has negotiated a limited trade deal with the Trump administration so far is the United Kingdom, which has accepted a 10% U.S. tariff on many products, including cars, in exchange for special access to aircraft engines and British beef.”
In an interview with Fox News that day, U.S. Treasury Secretary Bessent confirmed the impasse in negotiations with Japan, saying, “Each country has a different agenda for trade negotiations, including Japan, which Trump complained about again on Monday and Tuesday.”
Ryosei Akazawa, Japan's top trade negotiator and economy minister, said at a news conference on the 1st, "I have repeatedly said that agriculture is the foundation of the country," and "our position in negotiations with the United States has not changed. We will not engage in talks that sacrifice the agricultural sector, and we will continue to negotiate with U.S. officials to protect Japan's national interests."
President Trump wrote on Truth Social on the 1st, "Japan's reluctance to import U.S. rice is a sign that the countries have screwed up the United States."
Regarding the two-day Asian market decline, Reuters reported on the same day that “fiscal concerns, trade uncertainty and the trajectory of the U.S. interest rate path have led investors to dump U.S. assets and seek alternatives.” “Investors are concerned that Trump’s confusing trade policies could hurt U.S. economic growth, which has underperformed the dollar, which has fallen more than 10% this year in its worst first-half performance since the 1970s, and the dollar index, which measures the U.S. currency against six rivals, was at 96.649, near its lowest since March 2022.”
See <Trump's 'transitional' recession due to consecutive declines in stock market, 'continuous decline' in corporate confidence, March 11, 2025>