Dollar volatility tumbles as currency markets move past ‘Trump shock’

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Currency markets have moved beyond the “Trump shock” that sparked big gyrations earlier in the year, as measures of dollar volatility tumble to levels last seen before the US presidential election.

Expectations of swings in the dollar’s value against the euro and the yen, which spiked following Donald Trump’s election last November, have fallen this month to their lowest in more than a year, according to indices provided by CME Group.

At the same time the US dollar index, which measures the greenback against a basket of currencies including the pound and the euro, has regained some of the year’s sharp losses to trade close to its level before it began to surge in the run-up to Trump’s win.

Investors and analysts say a series of tariff deals with big US trading partners such as the EU and China have sucked volatility out of the market, while the US economy has weathered the onset of tariffs better than many expected. Meanwhile, big central banks are nearing the end of their cycle of interest rate cuts, draining another source of market instability.

“The world is learning to live with Trump,” said Chris Turner, head of markets research at ING. “Investors have learned to deal with headlines with a pinch of salt.”

The dollar strengthened before the US election on a bet — labelled the “Trump trade” — that the Republican’s trade and tax policies would strengthen the world’s biggest economy and its currency. 

That unravelled dramatically as Trump’s tariff announcements in April rocked currency markets, with a record nearly $10tn in daily FX volumes that month. 

Worries about the domestic economic impact of the trade war as well as concerns over Federal Reserve independence sent the dollar index tumbling to its worst start to the year since the 1970s.

But the dollar has ground higher since the summer, helped by a rally in US stocks that carried Wall Street to record highs before this week’s pullback in tech shares. Some big fund managers argue worries over US assets were overdone. 

“For all the talk of the end of US exceptionalism, when you look at the big picture, the dollar has been a strong currency for several years,” said Robert Tipp, head of global bonds at PGIM, suggesting that the dollar’s decline this year represents a “correction in a bull market” rather than “the beginning of the end”. 

The collapse in volatility expectations is the market saying “the ‘Trump shock’ is over”, wrote Deutsche Bank’s George Saravelos in a note this week, pointing to easing trade tensions and fiscal policy on “autopilot”. 

“What else is there for President Trump to do to shock the market? We are struggling to come up with an answer ourselves.”

A lack of US macroeconomic data due to the country’s longest-ever government shutdown has also dulled volatility in the dollar and US Treasury markets, analysts say.

Investors with limited comprehensive data information about inflation, the labour market and consumer spending have held off from taking big positions. A measure of volatility in the Treasury market — ICE’s Move Index — has fallen to four-year lows since the shutdown began.

The dollar has also received a boost from last month’s Federal Reserve meeting, where the central bank cut rates but warned that the next cut was not a “foregone conclusion”. A slower pace of rate cuts would typically support the currency.

Investors said this showed the currency was now responding to the traditional determinants of currency strength, principally differences in interest rates between countries. “We’ve settled back into more traditional drivers of FX,” said ING’s Turner.

Demand for call options on the dollar, a bet that the currency will strengthen, is outpacing put options by the most since February, according to separate data from CME Group.

Some fund managers said the dollar was regaining its traditional role as a stabiliser in their portfolios, because of its tendency to strengthen in times of global stress: a quality that had been called into question when the currency plunged alongside risky assets following Trump’s April tariff salvo.

The start of the year was “more of an anomaly than the trend”, said Rushabh Amin, a portfolio manager at Allspring Global Investments. “We think the dollar will continue to act as a portfolio diversifier going forward, particularly for foreign investors.”