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Since President Trump’s “Tariff Liberation Day” announcement, one of the most surprising developments has been the persistent decline in the U.S. dollar. While many expected tariffs to boost the greenback via higher inflation and potential rate hikes, the opposite has occurred. Instead, investors are questioning whether this is an early warning sign of broader stress—or simply a long-overdue global portfolio rebalance.

Prior to the April 2 announcement, consensus among economists was that tariffs would strengthen the dollar. Higher inflation would mean fewer Fed cuts, driving bond yields higher and supporting the currency. However, the dollar has dropped more than 4%, while the euro has gained nearly 3%, defying most traditional economic models.

Key Market Reactions

• 5Y TIPS breakevens fell 20bps after the tariff news—despite expectations of rising inflation.

• 5Y real yields rose, signaling rising growth fears and real rate stress, not inflationary pricing.

• U.S.-focused ETFs saw sharp outflows, while Europe-focused and ex-U.S. global ETFs remained stable or saw inflows.

• MSCI World’s U.S. weighting rose from 48% in 2010 to 73% today—a level some argue is unsustainable.

The ‘Mini-Crisis’ Analogy

The current dynamic resembles a classic emerging-market selloff, where rising real yields, falling currency, and capital flight converge. Some liken it to the U.K.’s “Liz Truss moment” in 2022, when her mini-budget triggered a market revolt, a bond crisis, and her resignation.

Trump’s tariff escalation may be triggering a similar market response, with investors questioning U.S. policy credibility and reallocating capital accordingly.

Portfolio Rebalancing in Motion?

This may not be the “end of the dollar,” but it could mark the end of U.S. exceptionalism—a reversion of the extreme U.S. overweight built into global portfolios over the past decade. Following similar dynamics post-2000 tech bubble, investors gradually shifted back into Europe and Asia, reducing their U.S. exposure.

The pattern is beginning to reappear: ETF flows suggest capital is rotating away from Wall Street, back into global equity markets. The short-term pain for U.S. assets could be the early phase of a longer reallocation cycle.

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