Dollar challenges system

[Ben Graham]

Double standards. Scott Bessent criticizes Jerome Powell for appearing at the hearings in the Lisa Cook case, yet he himself is involved in the Supreme Court proceedings on tariffs. The Treasury secretary is trying to calm markets, calling the idea that European investors would sell US assets absurd — while reaching out to Deutsche Bank's management to quiet the analyst who raised that idea. The White House is jittery, and in such conditions making the right decisions becomes extremely difficult. No wonder investors are fleeing the dollar and all things American.

Europe holds twice as many US stocks and bonds as the rest of the world combined. Deutsche Bank calls this a capital weapon. If it fires, the consequences would be severe. So far, however, the EU's response has been largely bellicose rhetoric. In a world governed only by force, it supposedly stands ready to retaliate. All of this is very reminiscent of April's events. Back then, Europe also seemed ready to unite against Trump's tariffs, but in practice, it didn't have the stomach for it.

Donald Trump is confident the EU will continue to invest in the US economy. After all, he says, they've worked toward this for so long. The Old World apparently needs it. Again, as with Scott Bessent, the president is presenting wishes as facts.

Dollar volatility dynamics

The White House's statements are so contradictory that you want to get out of the United States as quickly as possible. Investors are fleeing, and the slogan "sell America" keeps weighing on stocks, bonds and the dollar. The euro seems to have forgotten it isn't the favorite in a trade war with the US. EUR/USD is rising rapidly on hopes of fiscal stimulus and a weakening US economy due to tariffs.

The problem is that this time events could unfold differently from those in April–June last year. A full?blown trade war would be ruinous for both the European and the global economy. US resilience could revive the theme of American exceptionalism. As a result, we might see a repeat not of 2025 but of 2018, when US dominance in the trade conflict with China led to a stronger dollar and a collapse of the yuan.

Will Europe really stand firm over Greenland? The collapse of the post?World?War?II international order would be costly for the global economy and financial markets. No one fully knows what game Donald Trump intends to play. It is quite possible investors will finally get TACO — "Trump Always Backs Down" — and that would be good for the US dollar.

Technically, the daily chart for EUR/USD shows bulls holding the initiative. Bears have failed to storm the important pivot supports at 1.1710. It makes sense to hold long positions opened from 1.1615 and 1.1645 on EUR/USD.

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