When will it settle?

The recent decline in global equity markets has hit US equity indices the hardest. The fall has coincided with a weakening of the US dollar against European currencies such as the euro and even more so against smaller currencies such as the SEK. 

The weakening of the USD against the EUR also occurred the  last time Trump was in the Oval Office. EUR/USD peaked at around 1.58 in April 2008. Thereafter, the USD gradually strengthened against the EUR, with the pair hitting a low of around 1.07 in mid-December 2016 (a few weeks after Trump was first elected US president). Then, just like this time, the euro started to recover some ground against the USD, with EUR/USD reaching almost 1.20 in May 2018. Then there was another trend reversal, with EUR/USD falling back to 1.09 in April 2020. In September 2022, EUR/USD fell below 1.0 for the first time since 2002, before recovering to trade around 1.1.

Since the beginning of 2025, the yield on two-year US government bonds has fallen from 4.2% to 3.95%, while the German equivalent has risen from 1.9% to 2.2%. The US interest rate market is now pricing in three rate cuts by the Federal Reserve over the course of 2025, compared with just over one cut two months ago. It is the increased likelihood of a recession that is driving US rates lower. A lower Treasury yield makes US bonds less attractive. European countries are now being forced to build up their militaries as the previous US military support for NATO and Europe is no longer evident. This is causing European interest rates to rise, which should help strengthen the EUR against the USD.

Behind the turmoil in the equity and currency markets, where investors encounter new risks on an almost daily basis, is  U.S. President Trump, who has kicked off his second term with a vengeance, proposing tariffs against Canada, Mexico, Europe, and China. Countries outside the U.S. have naturally reacted, and in some cases, such as Canada, have proposed counter-tariffs. Trade is a complicated matter these days; for instance, car parts often cross borders several times between the U.S. and Canada before being assembled into a vehicle produced in the U.S. Trump's decision last week to impose tariffs on cars illustrated how economic realities limit how high tariffs can go—at least within North America—without harming his own voters with more expensive U.S.-made cars.

The US still imports more than it exports, but the gap has narrowed in recent years. The main trade deficit remains with China, which accounts for 7.0% of US exports and 13.4% of US imports. Unlike his first term as US president, when the focus was on US-China trade relations, Trump has this time put more emphasis on US neighbours Canada and Mexico, with which US exports and imports are more balanced. North America, or NAFTA (North American Free Trade Agreement), has had two free trade agreements between the US, Canada and Mexico, the first from 1994 and the second from 2020.

A weak US dollar and lower interest rates could be part of Trump's strategy to improve the US economy, as the US dollar has a special role as the world's reserve currency. This has allowed the US government to have a much larger national debt than other countries without having to raise interest rates significantly. However, Donald Trump does not seem to have much focus on this issue.

Our conclusion is that as long as Trump continues to waffle on his proposals, the stock market will remain volatile. Let's hope that the car tariff exemption for Canada and Mexico is the first example of Trump having to adjust to reality. If and when the tariff proposals are translated into more modest changes, we believe that the USD will regain some strength.