Still, market reaction was tame. Short-term Treasury yields fell slightly, while expectations such forced easing of monetary conditions will lead to inflation pushed the yield on the 30-year bond up 3.9 bps to 4.928 per cent.
The S&P 500 stock index opened a slight 0.06 per cent lower, while the dollar’s index versus a basket of currencies was 0.27 per cent easier.
“People want to see if it happens, but at the same time, it’s very difficult to sell the US because of the credibility issues,” said Tohru Sasaki, chief strategist at Tokyo-based Fukuoka Financial Group.
One factor investors have to consider is Trump’s trade deals, which require countries across Europe and Japan and South Korea to invest hundreds of billions in the US, Sasaki said.
“If there is a lot of investment into the US, eventually the dollar will be supported, US equities will be supported. So you may just lose money making a short position in the dollar or US assets.”
EXCEPTIONALISM
Trump’s gradual ratcheting up of his campaign to exert more influence over the path of monetary policy has already knocked confidence in US sovereign debt as a safe investment, and in the exceptional advantage the dollar enjoyed as a currency of choice.
That advantage had allowed the US to fund a massive national debt that currently stands at US$36 trillion, and owe international investors some US$26 trillion at the end of 2024.
Foreign money has been leaving US markets since Trump took over as president.
Global ex-US equity funds have received massive flows as investors redirected capital from the US, LSEG Lipper data shows. Investors have sold US-focused funds steadily since May.
The dollar index has lost more than 9 per cent of its value so far this year, and while US stocks have been hitting record highs this month, they have lagged the double-digit gains in many other markets, riding a technology and artificial intelligence boom.
Foreign official and international accounts, such as central banks and reserve managers, have also been shedding US Treasuries, Fed data shows. Their holdings have dropped this year, some US$35.6 billion during the week ending Aug 20 alone.
“Markets have not priced in the fact that Trump could go after other Fed officials. What is priced in right now is that we have a higher chance of a rate cut in September and further cuts this year,” said Shoki Omori, chief desk strategist at Mizuho Securities.
“The dollar and US rates will perform (based on) how aggressively Trump speaks about the Fed going forward.”
