After serious consideration, we acknowledge the USD’s longer-term downside risks in our currency forecasts.

US President Donald Trump’s “Make America Great Again” or MAGA agenda, especially his tariff proposals on Liberation Day, have shaken investor confidence in the foundational pillars – US economic strength, institutional trust, and geopolitical influence – that upheld the USD’s pre-eminence as the world’s dominant currency after World War II.

The first risk is a less exceptional and less stable US economy. The IMF expects Trump’s tariffs to lower US GDP growth to 1.8% in 2025 from 2.8% in 2024, adding that US recession risks have increased to 37% from 25%. The sweeping tariffs have disrupted established trade patterns, which major US retailers warned could empty supermarket shelves.  Grappling with heightened uncertainty, US businesses will likely delay investment and hiring decisions. US consumers face higher prices, increased job uncertainty, and acute market volatility that directly impact their retirement accounts, such as 401(k)s and IRAs, which are heavily invested in equities.

The high tariffs that the US and China – the world’s two largest economies – imposed on each other (145% on China and 125% on the US) were likened to a trade embargo that threatened global trade and the world economy. The IMF now sees global growth lower at 2.8% in 2025 vs. its previous 3.3% forecast in January, below the historical average of 3.7% from 2000-2019.

The second risk is financial market stability. Trump’s protectionism and unpredictable policy decisions have started to erode the confidence in the US as a prime destination for foreign investment, which was painstakingly renewed after the Global Financial Crisis. Trump risks transforming the US from the investment magnet he seeks into a risk that international investors may hesitate to take.

Trump’s approach to fixing global imbalances through tariffs and pressure for countries to buy more US goods converts them from USD earners into USD spenders, risks undermining the recycling system that financed America’s deficits. Surging gold prices to lifetime highs reflect the disincentive for countries to add more to their US holdings. The 26.5% rise in gold prices this year looks poised to overtake the 27.2% increase for all of 2024.

The third risk is institutional trust. Since taking office, Trump’s actions saw the US steering away towards a new international order. The world is questioning America’s political leadership, which established the post-war global order based on rules, free trade, open markets, and collective security based on trustworthiness. They raise hard questions for foreign governments that rely on the USD to anchor foreign reserves, global institutions that hold Treasuries as risk-free benchmarks, and private investors who anchored portfolios around US assets and trusted the USD as a haven in volatile times.

Trump used the lessons from his first term to circumvent the traditional checks and balances to advance his MAGA agenda with unprecedented speed and assertiveness in his second term. It raises concerns about the two pillars – monetary policy independence and sustainable fiscal management – supporting the USD’s status. Despite Trump’s assurance that he has “no intention” of firing Fed Chair Jerome Powell, investors viewed Trump’s interference in the Fed’s independence as inevitable, whether soon or after Powell’s term expires in May 2026. We can expect Trump to criticize Powell again for not cutting rates at the May 7 FOMC meeting. Trump’s desire for lower rates appeared tied to financing his ambitious tax cut pledges totaling more than USD10 trillion over the next decade. 

The Trump administration’s fiscal policy will draw scrutiny this summer. US Treasury Secretary Scott Bessant is prioritizing securing the permanent extension of the USD4 trillion 2017 Tax Cuts and Jobs Act by Independence Day (July 4), days before the 90-pause on the “Liberation Day” tariffs expires. Bessent will seek to increase the federal debt ceiling by USD5 trillion through budget reconciliation before the estimated “X-date” in June or July.

Bessant also advocated that the Treasury take a stronger role in crafting bank regulation. His proposal to ease the regulatory burden of banks’ leverage limits brought back memories of the Silicon Valley Bank collapse in March 2023. Following the regulatory rollbacks in 2018, SVB significantly increased its holdings of short-term bonds (Bessent is targeting long-term bonds), exposing it to losses from high inflation and hefty Fed hikes, triggering a bank run that led to its insolvency.

There is no certainty that the ongoing trade negotiations will significantly lower tariffs by the end of the 90-day pause on reciprocal tariffs in July. China has learned from its experiences during Trump 1.0. Beijing has become less deferential towards Washington, has shown its readiness to retaliate with punishing tariffs, and has resisted one-sided trade negotiations.

While Japan and South Korea have not mirrored China’s tough stance, they appeared willing to resist without escalating confrontation while preparing contingency strategies – protecting industries and expanding global market reach. Many countries likely resent that Trump is leveraging America’s position as the world’s largest buyer to pressure companies to invest more in the US and less in the rest of the world, especially the transshipment hubs. Other countries are looking to like-minded peers to uphold the global common good, safeguard open markets, and preserve the multilateral order that has supported international stability and economic growth since WW2.

In the end, someone must foot the bill – Trump demands that it won’t be America, forcing countries to choose whether their private or public sectors absorb the cost, even as they settle for lower tariffs and reduced market access. How countries manage this trade-off will ascertain their economic resilience and their future ties with the US. By forcing countries into short-term choices, Trump risks remaking global trade patterns in ways that will ultimately weaken America’s own position over the longer term.

Overall, the Trump administration is trying to achieve too much too fast, and markets are taking notice. Each initiative carries risks, which collectively amplify market concerns about high tariffs and trade negotiations, rising inflation and job insecurity, the Fed’s independence, fiscal discipline, financial sector stability, and the USD’s status.


Quote of the Day
“You don’t lose if you get knocked down; you lose if you stay down.”
     Muhammad Ali

April 28 in history
In 1967, boxing legend Muhammad Ali refused induction into army and was stripped of his boxing title.

Philip Wee

Senior FX Strategist - G3 & Asia

[email protected]