The market upheaval of the last month may be over for now, but it has left global investors with a big lingering doubt – can they still trust the US?

The day after US stocks enjoyed one of their biggest rallies in history (9 April), equities, bonds and the dollar all went into reverse as traders liquidated US assets in favour of safer alternatives.

Just as an example, the Swiss franc surged the most in a decade while gold climbed to a new all-time high above $3,200 per ounce and it has subsequently touched $3,500 per ounce before retrenching.

As analysts at Bloomberg put it, these moves in stocks, bonds and the dollar all point towards ‘the same sobering conclusion; Trump’s chaotic tariff rollouts – regardless of where the eventually settle – is rapidly undermining confidence in the US economy and threatening to keep markets on edge for the next three months as traders wait to see how it will all play out’.

A FISTFUL OF DOLLARS

Until this year, it was taken as read the dollar was the world’s reserve currency, 10-year treasury yields represented the ‘risk-free rate’, and the lofty valuation of the US stock market was a reflection of the ‘exceptional’ companies which dominate the indices and their equally exceptional earnings growth.

Now, some of the brightest and best analysts and investors are openly asking whether US assets are still the ‘go-to’ choice or whether they should be reducing their exposure and looking elsewhere for returns.

Deutsche Bank’s head of foreign exchange research George Saravelos argues ‘the market is reassessing the structural attractiveness of the dollar as the world’s global reserve currency and is undergoing a process of rapid de-dollarisation’.

Since 1947, the dollar has been the world’s reserve currency, which has meant the US has enjoyed structurally lower borrowing costs than other countries as well as being able to buy foreign goods, services and assets effectively ‘on credit’.

Little wonder Valery Giscard d’Estaing, French minister of finance and economic affairs in the early 1960s, described the US as having an ‘exorbitant privilege’.

According to a UBS reserve manager survey, today over half the world’s central bank reserves are in US dollars – essentially ‘rainy-day’ money to be used in the event of an emergency.

For private companies, that ratio is likely to be higher, however, as the dollar is still the main currency used in international trade and finance.

Yet, as economic regionalism or nationalism increases and supply chains shorten thanks to re-shoring, trade in global goods is likely to decline meaning there will be less demand for reserve currencies in the future.

Paul Donovan, chief economist at UBS Global Wealth Management, lists five criteria which ‘make’ a reserve currency – liquidity, access, stability, political influence and rule of law.

‘Superficially, dollar liquidity would seem to be secure,’ says Donovan, although there are questions over access as the Federal Reserve is rumoured to be considering ending swap arrangements under pressure from the administration.

There are also questions over whether, in an attempt to force the value of the dollar down to ‘normalise’ its trade balance, the US could impose capital controls on its trading partners – something it has only done up until now against Russian central bank assets.

Stability, geopolitics and the rule of law all ‘have the potential to weaken the dollar’s reserve status,’ says Donovan, and while they haven’t had a meaningful effect as yet, this is potentially the area where the private sector has the most concerns.

Large money-managers are beginning to weigh the idea of a shift to a ‘multi-polar’ system in which currencies like the euro assume a larger role than in the past.

‘There is a good case for the end of dollar exceptionalism,’ JPMorgan Asset Management’s chief investment officer, with $3.6 trillion under management, told the Financial Times in an interview.

Mike Riddell, fixed income portfolio manager at Fidelity International and a regular contact of Shares, said in the same interview the recent sharp move higher in longer-dated government bond yields coupled with a weaker US dollar looks like ‘good old capital flight’.

NO LONGER RISK-FREE?

Apart from the dollar, the easiest way for countries, sovereign wealth managers and other large investors to reduce their exposure to the US is by selling treasuries.

The 10-year US treasury has always been considered a ‘risk-free’ way to invest, with the return on equities and other riskier assets determined by a ‘risk premium’ set by the market.

With the 10-year bond suffering heavy selling alongside equities and the dollar, sending the yield up by almost 0.5% in just a week, something which hasn’t happened since 2001, the assumption that it is truly risk-free is starting to be challenged.

‘There is real pressure across the globe to sell treasuries and corporate bonds if you are a foreign holder,’ said Peter Tchir, head of US macro strategy at Academy Securities.

Although the market for US government debt is enormous at nearly $30 trillion, the volatility caused by on-off tariff announcements has caused huge amounts of strain and it took the intervention of the Boston Fed president to reassure markets with the message the central bank could intervene to stabilise things if markets became ‘disorderly’.

Worryingly, according to analysts at JPMorgan, ‘market depth’ – which is the ability to absorb large trades without major moves in prices – has worsened ‘significantly’ in recent weeks with even smaller trades causing volatility, which is causing some investors at the margin to lose confidence.

As one European bank executive said in an interview with the Financial Times: ‘We are concerned, because the movements you see point to something else other than a normal sell-off. They point to a complete loss of faith in the strongest bond market in the world.’

Ernie Tedeschi, a former top economist in the Biden administration and currently director of economics at Yale University’s Budget Lab, added: ‘If treasuries are no longer a safe-haven asset that has major implications for balance sheets across the board – businesses, nonprofits, pensions, households – so much of world finance is predicated on US treasuries being safe.’

The implications go further still – even a modest shift out of treasuries and the dollar would raise the cost of US borrowing at a time when interest costs are already rising.

LIVING BEYOND ITS MEANS

As Howard Marks, founder of Oaktree Capital Management, put it in a recent note, the world’s high opinion of the US economy, rule of law and fiscal solidity has allowed it to hold a ‘golden credit card’ with no limit and no bills.

This has enabled the US to run fiscal deficits in each of the last 25 years and all but four of the last 45, including trillion-dollar-plus deficits in each of the last five years.

‘In other words, we’ve been able to live beyond our means,’ says Marx, ‘with the federal government spending more than it takes in via taxes and fees. This has led to one of the worst things about the US: the $36 trillion national debt and the grossly irresponsible behaviour in Washington that caused it.’

If other countries become less willing to buy treasuries and demand higher interest rates, what would happen to the trade deficit given big creditor nations already own plenty of US debt?

HOW DO YOU PRICE UNCERTAINTY?

Having started 2025 with the certainty president Donald Trump’s policies would be good for the US, and therefore ‘US exceptionalism’ and the lofty valuation of US stocks was set to continue, we now live in a world full of uncertainties – over the appeal of the dollar, the risk-free status of 10-year treasuries and the attractiveness of US stocks in a world of policy uncertainty.

When uncertainty increases, consumers and companies tend to react by spending less, which reduces demand, thereby reducing growth.

The longer demand is held back, the more the supply side has to contract to avoid a mismatch, so there is a double hit to growth.

Studies find increased uncertainty over inflation and/or economic growth makes consumers put off buying durable goods, de-risk their investments and work harder.

Businesses react by reducing prices, then reducing employment and investment, and ultimately by spending less on new technology or upgrading their facilities, all of which acts as a drag on future growth.

Investors react to uncertainty by demanding a higher return to compensate them for the increased risk, which means a larger risk premium on stocks than they paid in the past.

The only way for this to happen is for the ‘earnings yield’ on stocks to rise, which means the price-to-earnings ratio has to fall.

There is a great deal of evidence to support the correlation between the earnings yield and future stock market returns, and although prices of US stocks have fallen the earnings yield is still not high enough to offer attractive long-term returns.

In the view of Deutsche’s Saravelos, if the US is to remain an option, assets need to be re-priced: ‘Currency and bond market weakness should ultimately lead to cheaper valuations and new equilibrium of asset pricing which becomes attractive for foreigners to invest.’

Whether this repricing happens quickly or slowly is academic – what matters is the further the market strays away from its historical norm into ‘exceptional’ valuation territory, and the longer it stays there, the more likely it is to come back to earth.

As Rob Arnott, head of Research Affiliates, says: ‘In the world of finance, capital markets and macroeconomics, time series rarely fail to exhibit long-term mean reversion.’

BONDS vs STOCKS

Bonds are typically seen as less risky than stocks because they offer a predictable return and they rank above shares in a company’s capital structure, so if it were to get into trouble bondholders would get some or all of their money back while shareholders could end up with nothing.

Government bonds are considered the safest of all investments because the risk of the US (or the UK, in the case of gilts) going bust in negligible.

Usually, when there are ructions in the equity market, investors retreat to the safety of bonds, especially treasuries which are backed by the full faith and credit of the US.

Bond prices and yields are inversely correlated, so when prices go up due to strong demand yields go down and when demand is weak – such as when stock markets are booming – yields go up.

It is very unusual for stock prices and government bond prices to move the same way at the same time, as they have started to due to tariffs.

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