Mispricing the volatility regime?

It’s hard to price in the unpredictable.

That’s the market’s dilemma with Trump’s second coming. While some optimistic investors may still dream of a “Trump put” redux, the man clearly isn’t reading from the same script. His tariffs and tax cuts – especially their shapes, sizes and implications – are no longer just rhetorical threats.

From floating a 10pc blanket import duty to calling for 60pc tariffs on Chinese goods and 100pc on EVs, Trump has made it clear he sees trade war as economic strategy—not the exception, but the policy. Markets may still be banking on a familiar deregulatory boom, but what if they’re mispricing a volatility regime?

The dollar’s supremacy, long seen as unshakable, is starting to look more conditional. Even longtime skeptics of de-dollarisation have begun to ask if something’s shifting. The US still accounts for a quarter of global GDP and much of world trade is still settled in greenbacks. But lately, more eyes are on the political risk side of the ledger. Can investors afford to shrug off a future where US policy whipsaws based on one man’s mood?

Recent moves suggest they’re not so sure.

Foreign central banks have trimmed their Treasury holdings. The dollar’s share of global FX reserves has slipped to its lowest in over two decades.

Japan’s once-reliable appetite for US debt is cooling as rising JGB yields make domestic assets more attractive. Taiwan and Korea have been selling dollars to prop up their currencies—some say to curb inflation, others whisper it’s a quiet rethink of old habits. Even the Hong Kong Monetary Authority, usually conservative to a fault, has begun diversifying away from Treasuries.

Let’s not forget that these aren’t fringe players. They’re the same surplus nations that once backstopped American deficits.

It’s not that the world has found a better alternative—China’s yuan isn’t convertible, and the eurozone is still a fragmented fiscal union. But that doesn’t mean the growing fear of dollar overexposure is real.

After the West froze Russia’s reserves in 2022, more than a few capitals started drawing up contingency plans. If geopolitics can render hundreds of billions unusable overnight, then the dollar’s neutrality is in doubt.

That’s not a gold-standard problem — it’s a trust problem.

Trump’s policies could accelerate that trust erosion. Blanket tariffs, trade spats with Europe, exit threats from NATO, and a willingness to weaponise the US financial system all feed the perception that dollar dependence now carries political risk. That’s a new variable for markets used to treating US assets as the default safe haven.

If tariffs slam global trade, EM economies take a hit — and they may not look to Washington for shelter next time.

Even in the US, markets are jittery. The Fitch and Moody’s downgrades didn’t come out of nowhere. They were warnings: the world’s biggest economy is racking up deficits like there’s no tomorrow, with little sign of political will to reverse course.

A Republican tax package passed this year adds another $3.8 trillion to the national debt over the next decade. Interest payments are now the fastest-growing line item in the federal budget. How long can the US count on foreign capital to fund this spree if the returns — economic, political, reputational — begin to diminish?

The carry trade, too, is unwinding. For years, Japan’s near-zero rates made it the funding base for global risk-taking. But now that the BoJ is hiking and the yen is gaining strength, that cheap money is reversing. That’s already made another generation of over-eager investors that got their over-stretched portfolios burnt living examples of a chilling bit of Wall Street folklore; that when carry trades reverse, they don’t trickle, they rush.

This isn’t just a Japanese problem; it’s a liquidity problem for every market that grew fat off foreign flows chasing yield.

Wall Street is still treating these as technical shifts. But what if they’re signs of a more permanent rotation? If capital begins to fragment across blocs — into yuan zones, euro zones, regional settlement schemes — what happens to the dollar’s one-size-fits-all role? What if the next crisis doesn’t see a rush into Treasuries, but into a basket of alternatives?

These are not tomorrow’s hypotheticals. They’re already live questions, whispered in policy circles and currency desks alike. Trump’s erratic style is now forcing them to the surface.

Treasuries and the dollar did not rally in the latest Big Money rush to safety. In the past, investors could count on some baseline policy coherence — even when politics turned ugly. But the current moment lacks that cushion. If one tweet can send tariffs sky-high, alliances are downgraded to “transactional,” the rules of the game keep shifting, then why bother playing with the same chips?

It would be naive to call this the end of the dollar’s reign, of course. But for the first time in decades, its privileges are being questioned not just by fringe critics, but even by the very institutions that have always held it up. And that makes Trump’s volatility turn from just a domestic issue to a global market variable.

There was a time when erratic leadership was seen as priced in. That’s no longer guaranteed.

Copyright Business Recorder, 2025