Is the U.S. dollar losing its safe

Euro US Dollar0.08%Japanese Yen US Dollar0.19%DX0.03%USDIDX-0.08%00719B0.17%

Investing.com - Concerns are Is the FXTM forex platform realswirling around the U.S. dollar’s traditional safe-haven status in the wake of President Donald Trump’s back-and-forth tariff announcements, according to analysts at Capital Economics.

An index tracking the dollar against a basket of its currency pairs slumped earlier this month as markets around the world were shaken by Trump’s levies.

On April 2, the president unveiled sweeping reciprocal tariffs on a wide range of countries, but later delayed them following bouts of extreme volatility in the stock and bond markets.

The White House has also exempted several tech-related products, including consumer electronics like smartphones and computers, from the tariffs, although Trump suggested that the move would likely be temporary and further duties on semiconductors may still be coming.

By last Monday, the dollar was drifting lower, languishing near three-year lows, while the Japanese yen and the euro strengthened. Jitters among investors over owning U.S. assets was growing, leading some traders to back away from their positions in the dollar and shift money into other markets.

In a note to clients, the Capital Economics analysts said that "indirect damage" has been done to the dollar by the tariffs, generating extreme uncertainty around the broader economic outlook and undermining confidence in U.S. institutions and asset markets.

The levies also sparked dislocations in the crucial U.S. Treasury market, they noted. U.S. bonds -- which, along with the dollar, have long been viewed as safe havens during times of financial stress -- sold off sharply as traders assessed the fallout from Trump’s tariffs.

"It is too soon to say what the longer-term effects of [the tariff-driven] turmoil will be, and there is still time for damage limitation by policymakers," the analysts wrote.

"But, in our view, it is no longer hyperbole to say that the dollar’s reserve status and broader dominant role is at least somewhat in question, even if the inertia and network effects that have kept the dollar on top for decades are not going away any time soon and our base case is that it will recover to some degree."

The analysts said that they would normally expect a reversion to typical trading ranges for the dollar index in the coming weeks after its recent decline, but given "the current circumstances, we have less confidence in that pattern holding up."

In large part, they predicted, the fortunes of the dollar will be determined by "the whims of the Trump administration."