Since President Trump launched his initial salvo of broad-based tariffs on April 2, financial markets have fallen into turmoil. Ordinarily, this would be expected to buoy the value of the dollar, which is a “flight-to-safety” currency sought out by investors during times of crisis. Instead, the value of the dollar, too, has plunged. In fact, as I show below, relative to the predictions of a simple econometric model, the dollar has fallen by the greatest margin in the past four years. This suggests that the turbulence in the financial markets was more than just investors getting “yippy,” in Trump’s words. It may reflect the beginnings of a serious reconsideration by global investors of the performance and management of the US economy and the dollar.
The dollar is world’s most important currency. The lion’s share of globally traded commodities, international trade, global finance, and international reserve holdings are denominated in dollars. As my colleague Mark Sobel and I have explained, the dollar’s dominance derives from the strength and dynamism of the US economy, the unchallenged stature of our rule of law, the prudence of our economic policymaking and our close cooperative relations with our allies. But we have also cautioned that if the US abandons these strengths, pursuing reckless trade and fiscal policies, breaking trade agreements, bullying our allies, and undermining support for global institutions, this will encourage other countries to seek alternatives to the dollar.
Is this process now underway? It is early days, but the financial turbulence surrounding Trump’s chaotic tariff announcements is not a good sign. As indicated in the chart below, a surge in financial market volatility (the VIX index) after Trump’s April 2 announcement triggered a “dash for cash” by leveraged hedge funds, fuelling a selloff in Treasury bonds leading to soaring yields.
Fig. 1. Volatility Index and US 10-Year Treasury Yield, March 10–April 10 2025
Deleveraging-driven selloffs in the Treasury market are unusual, because the demand for safe assets such as Treasuries tends to rise during times of volatility and crisis, lowering their yields. To be sure, such episodes are not unprecedented, and a similar selloff occurred during the March 2020 Covid-19 panic, when again both Treasury yields and the VIX soared upwards until massive intervention by the Fed managed to calm markets.
Fig. 2. Volatility Index and US 10-Year Treasury Yield, January 1–July 1 2020
However, there is a notable difference between the Covid-19 panic and the Trump tariff panic. In the former episode, the dollar—being a “flight-to-safety” currency—soared alongside the VIX as markets freaked out.
Fig. 3. Volatility Index and DXY Dollar Index, January 1–July 1 2020
Conversely, in recent days, the dollar appears to have failed to benefit from flight-to-safety flows, and it has fallen well below its level prior to Trump’s April 2 tariff announcement.
Fig. 4. Volatility Index and DXY Dollar Index, March 10–April 10 2025
How significant is this aberration? To make a more precise assessment, we estimated a simple equation regressing the level of the dollar on the 2-year Treasury yield, the difference between the 10-year and 2-year yields, and the VIX.
Table 1. Dollar Regression Results
| DXY Index | |
| OLS | |
| 2021-01-01 to 2025-04-10 | |
| US 2yr Yield | 3.70*** |
| (0.14) | |
| US 10yr Yield – US 2yr Yield | 1.71*** |
| (0.33) | |
| CBOE Volatility Index: VIX | 0.28*** |
| (0.03) | |
| Intercept | 84.12*** |
| (0.82) | |
| Observations | 1,067 |
| R-squared | 0.85 |
| Robust standard errors in parentheses | |
| *** p<0.01, ** p<0.05, * p<0.1 | |
Below is a chart comparing the actual and predicted values of the dollar. There are, of course, many misses between predicted and actual levels of the dollar, but the Trump tariff episode at the end of the sample appears to represent the largest such error. The model expects the spike in the VIX to substantially boost the dollar, but instead the dollar falls.
Fig. 5. DXY Index of the Dollar: Actual and Predicted
The plot of the regression residuals, below, indicates serial correlation of the residuals, so the results need to be taken with a grain of salt. Even so, the miss on the dollar is extraordinarily large.
Fig. 6. Dollar Equation Residuals: Actual minus Predicted
Does this mean the end of dollar dominance? Probably not. The pre-eminent role of the dollar in trade, international finance, and reserve holdings is hardwired in place by network effects, institutionalized practices, and the lack of viable alternative currencies, and it will take time for them to erode. But it is clear that, at least during this episode, the dollar has stopped acting like a “flight-to-safety” currency, and the simultaneous rise in yields and fall in the dollar suggests a pullback from dollar assets that may reflect mounting concerns about the chaotic direction and implementation of US economic policy.
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