Exaggerated Pessimism about American Currency Recovery
In the recent past, when the US stock market soared to new heights, folks were all about shouting "USA, USA!" thanks to the Magnificent Seven tech titans. But times have changed, and now the worry is that America might be on the decline as the world's top dog.
This downward spiral seems to be fueled by the astronomical federal government deficits, which have pushed the debt-to-GDP ratio past 120 percent, quadruple its 1980 level. This colossal debt means that an eye-watering $1 trillion is spent annually just on interest payments.
The US has grown exceedingly dependent on foreign investors and central banks to finance its spending spree and refinance its maturing debt. However, President Trump's protectionist policies have foreign financiers questioning their commitment to the US market. They're also left wondering if the US Treasury bond market and the almighty dollar will keep providing shelter in a world filled with economic and political uncertainties.
So, the plummeting dollar this year has been taken as evidence that Trump's "new world disorder" will hurt America's dominance. It might also signal a looming crisis if foreign investors start losing faith in the US.
But here's the twist: Is this end-of-days narrative just a bunch of alarmist hysteria triggered by the S&P 500 correction? After all, the stock market slide was due, in part, to Trump's trade wars. The Tech 7 companies, in particular, were hit hard when investors started questioning their spending on artificial intelligence infrastructure.
The anxiety escalated when the 10-year US Treasury bond yield surged from 4.00 to 4.50% in a couple of days, following Trump's tariff announcements in early April. This spike in bond yields, unsurprisingly, spooked the Trump administration, prompting the president to postpone his tariff increases.
While stocks and bonds were plummeting, the Dollar Index was taking a tumble, too, dropping roughly 10 percent. Was America no longer exceptional, as the prophets of doom claimed? Not so fast. Financial markets can be erratic, and these recent events might only signal a temporary downturn, not a death knell for American exceptionalism.
Let's break it down:
- The Dollar Index (DXY) has been closely connected to the Roundhill Magnificent Seven ETF since early last year. Foreign investors piled into US stocks at record levels last year, but when the DeepSeek R1 open-source AI platform launched, their trust in AI-heavy companies, including the Tech 7, wavered. This led to a sell-off of the Magnificent Seven in favor of Chinese and European stocks, causing the DXY to drop.
- The DXY isn't the standard trade-weighted dollar index as many believe. It's based on a mix of six major foreign currencies, but the weights remain constant. It's primarily driven by the euro, which makes up a whopping 57.6 percent of the index.
- On a weekly basis, the Federal Reserve's dollar index is usually closely correlated with the DXY, but this year, the DXY has plunged 8.3 percent, while the Fed's index has dipped only 4.8 percent. This indicates that the decline in the dollar may partly be a case of investors swapping US stocks for European ones.
While the US has piled on the debt, making the US Treasury market the largest, most liquid, and still safe capital market globally, this doesn't mean that the dollar will lose its pre-eminent status as a reserve currency. With the Tech 7 companies, such as Alphabet, Meta, and Microsoft, reporting impressive first-quarter earnings in 2025, investors might soon get back on board, which should prop up the DXY.
- The astronomical US federal government deficits, pushing the debt-to-GDP ratio past 120 percent, have raised concerns that foreign investors might lose faith in the US.
- President Trump's protectionist policies and trade wars have posed challenges to foreign financiers' commitment to the US market.
- The plummeting US dollar this year has been viewed as a potential sign of America's declining dominance in the face of economic and political uncertainties.
- However, the recent drop in the Dollar Index might just signal a temporary downturn, not a death knell for American exceptionalism, as financial markets can be erratic.
- Foreign investors' growing interest in Chinese and European stocks over US stocks, partly due to questionable spending on artificial intelligence infrastructure by Tech 7 companies, has contributed to the decline of the Dollar Index.
- Despite the US Treasury market's enormous size and liquidity as the largest and safest capital market globally, the US dollar's preeminent status as a reserve currency could be threatened if foreign investors continue to lose faith in the market.
- Impressive first-quarter earnings from Tech 7 companies, such as Alphabet, Meta, and Microsoft, in 2025 might entice investors to return to the US market, thus propping up the Dollar Index.
