Hello there,
Another week, another geopolitical risk emerges for investors. This time, the focus is back on Iran. President Donald Trump is weighing targeted strikes on the country’s security forces and leaders to inspire protesters. Two U.S. sources familiar with the discussions have told Reuters Trump wants to create conditions for "regime change" despite warnings from Israeli and Arab officials that air power alone won’t topple Iran’s clerical rulers.
The prospect of U.S. strikes is boosting the price of oil and precious metals but not the greenback. The dollar hasn’t acted like a safe-haven currency for a while now and it’s falling again despite Treasury Secretary Scott Bessent telling markets that Washington has a strong-dollar policy. Those comments came after Trump fuelled a selloff in the currency when he suggested he’s comfortable with the dollar’s decline.
A weaker dollar is of course good for U.S. exports and there has been a long-standing assumption in markets that Trump’s administration wants to unwind some of the dollar's strength as part of a push to shrink the U.S. trade deficit. But as Reuters columnist Mike Dolan writes, be careful what you wish for. The other side of that trade imbalance is a huge inflow of foreign capital into U.S. treasuries and equities. As Mike points out, the prospect of unhedged U.S. stocks and bonds suffering a 10-20% dollar hit may well destabilize that unprecedented investment imbalance.
And investors rushing to protect their U.S. assets against dollar depreciation could test banks' ability to meet demand for hedging. Hedging ratios are hard to pin down. They vary between investors and are often private, but Barclays estimates they fluctuated between about 46% at the start of 2025 and 50% in the aftermath of April's tariff shock.
A weaker dollar doesn’t mean a wholesale “Sell America” trade. The AI spending boom is still underpinning U.S. equity gains although investors are getting pickier. Microsoft and Meta both unveiled nose-bleeding amounts being spent on capex, with the former splashing out almost $38 billion in the quarter, up two-thirds on the previous year, and Meta boosting its capital spending plans for this year by 73%. But while investors applauded Meta’s stronger-than-expected sales outlook, they punished Microsoft for slowing growth in cloud sales.
Fed Chair Jerome Powell kept things nice and boring on Wednesday. The future of Fed independence is at the core of the dollar’s weakness but Powell would not be drawn on whether he would step down as a Fed governor in May or stay on until 2028. One reporter wondered why he would want to leave at all given threats to Fed independence, but Powell merely smiled.
Powell has two more opportunities to change rates before his term as Fed chair ends in May but it looks like he won’t be taking them. The U.S. central bank kept interest rates steady and signalled there could be a lengthy wait for any further reduction in borrowing costs. Futures markets are betting on no change until June.
Trump’s Greenland tariff threat was clearly a watershed moment for the world’s “middle powers”. Europe, Canada and other economies are ploughing ahead with their de-risking from America. British Prime Minister Keir Starmer is the latest leader to knock on Chinese President Xi Jinping’s door, talking up plans for a “sophisticated relationship" with Beijing.
Trump’s designs on Greenland have also spotlighted the race for critical minerals, a topic I dig in on (pun intended … sorry) in this week’s episode of Reuters Econ World podcast. Critical minerals correspondent Ernest Scheyder joins me to talk U.S. government equity stakes and undersea mining. Check out his latest exclusive on mineral price floors and watch the show here.
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