Trump Blinks: Watch For More Flip-Flops
UST, Gold, Dollar Provide Warning Signs
President Donald Trump had repeatedly said that he would not back off from tariffs that he had levied against US trading partners. The countries had taken advantage of the openness of the US economy for decades, he insisted, and the newly announced levies would go some way toward leveling the playing field. In order to achieve that objective, countries that faced higher tariffs could not retaliate with levies of their own. If they did retaliate, the United States would impose new tariffs and counter those nations’ moves.
After this stance pushed the US equity market lower since April 2 — Trump’s “Liberation Day” — the US dollar weaker, and long-dated US Treasury yields sharply higher, the President and his team capitulated on Wednesday. Tariffs on most economies, including the European Union, were postponed unilaterally for 90 days. On the other hand, China, which had the temerity to retaliate to the Trump tariffs, got no reprieve and is now set to face a 145% tariff.
China counter-retaliated raising the tariff yesterday to 125% on US products. Raising the tariff rate any further would be pointless, Chinese officials reasoned, because there would be little demand for US products at the new tariff level. The White House Press Secretary indicated yesterday that the President was “optimistic” that he could reach a deal with Chinese authorities and that he was waiting for a call from Chinese President Xi Jinping. But there is no indication that the Chinese want to restart talks, or that President Xi is about to call President Trump.
The Chinese reluctance to negotiate with Trump may have to do with the hit they see several US asset classes suffering in response to the tit-for-tat tariff increases. Let us count the warning signals.
First, the yield on 10-year Treasurys has risen from 4.13% on April 2 to an intra-day high of 4.58% yesterday. While rising inflationary expectations is one reason for the yield increase, that does not explain the entire movement. Repeated shifts in tariff policy have created US country risk (also known as sovereign risk) that was hitherto not present. Proposals floated by some Presidential advisors to reschedule short-term Treasurys into longer-dated issues, or to convert them into zero coupon bonds, may lower the fiscal deficit in the short-term but would also accelerate flight from the dollar.
A variation of these efforts are plans to weaken the dollar — proposals sometimes grouped under the rubric “Mar a Lago Accord” — in order to increase the competitiveness of US exports. While Treasury Secretaries in both Democratic and Republican administrations in recent decades have repeated statements that they support a strong dollar policy, no such assertion has yet come from Scott Bessent.
Second, as global investors have fled the dollar, where has the cash gone? The demand for gold provides an answer. The price of gold rose by almost 7% last week from $3,050 to a record $3,255 per ounce, with the increase being 2.5% (about $77 per ounce) yesterday alone. If holding dollars involves new risk, moving to gold offers investors a ready alternative.
Issuance of dollars, and the acceptance by foreign countries of paper currency or Treasury bonds in exchange for providing valuable goods and services, offers the United States with what is known as the right of seigniorage. Abuse that privilege, and the country gives up on what used to be a “free lunch”. This would be an expensive loss.
The third warning signal came from the dollar exchange rate. While it took less than $1.10 to buy a euro at the beginning of the week, the US currency weakened yesterday to more than $1.14 intra-day. Such a sharp swing is not uncommon with other global currencies but is extremely rare in the case of the US dollar which serves as the world’s key currency. Furthermore, heightened US tariffs ought to have strengthened the dollar but, instead, weakened it because frequent shifts in policy confused investors and led to a flight from the currency.
These concerns explain the abrupt backtracking on Wednesday by Trump on his tariff threats. And as other trade partners, especially Canada and the European Union, witness the President’s conciliatory stance in wanting a meeting with the Chinese leader, that would likely increase their reluctance to make concessions to the United States.
In short, expect movements in long-dated Treasury yields, gold and the dollar to continue to provide warnings on the viability of the Trump tariff plan.
Dr. Komal Sri-Kumar
President, Sri-Kumar Global Strategies, Inc.
Santa Monica, California
srikumar@srikumarglobal.com
@SriKGlobal
April 12, 2025
Sri-Kumar Global Strategies, Inc. advises multinational investors and sovereign wealth funds on global risk and opportunities. Dr. Sri-Kumar is regularly featured on business TV and Radio media, and is a frequent speaker in global financial centers on major topics that affect markets and investments.
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