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A 1.4% drop in the S&P 500 used to correlate with a stronger US dollar against most currencies, except the yen and Swiss franc. Currently, the dollar is lower against the euro and pound, and only slightly higher against commodity currencies.
Changes in tariff discussions during Trump’s presidency previously supported the dollar, but that trend has shifted. The market’s confidence in Trump’s focus on boosting the stock market and GDP has waned, as the government now indicates a willingness to accept short-term difficulties to achieve longer-term goals, such as lower government spending and re-shoring manufacturing.
Historical Context Of Dollar Declines
Historically, the US dollar has experienced similar declines during major events such as the housing crisis in 2007, post-9/11, and after the dot-com bubble burst.
This article outlines a clear change in how markets respond to both external shocks and US economic policy shifts. In previous cycles, whenever the S&P 500 posted a sharp drop—like the 1.4% fall mentioned here—the dollar used to strengthen reliably against most other currencies. This was more than a coincidence; it reflected a recurring pattern where investors sought the US dollar as a safe haven in times of financial stress. That no longer seems to be the case.
What’s being picked up recently is a deviation from historical norms. While the yen and Swiss franc generally move opposite to the dollar during volatile times, now we’re also seeing the dollar struggle against stronger regional economies like the eurozone and the UK, even as equities weaken. This hints at a deeper confidence in other monetary regions, or possibly a growing scepticism about the dollar’s role as the default during uncertainty.
Trump-era policy set a clear tone—protect the stock market and support economic growth aggressively. Traders responded predictably back then, buying dollars whenever trade barriers were discussed, expecting domestic-focused measures to deliver quick stimulus. Now, the dynamic is different. Washington appears ready to tolerate weaker consumer metrics and slower corporate earnings in service of longer-term plans, including tighter spending and renewed industrial investment. That’s creating hesitation around USD positions in near-term moves.
We’ve seen these types of dollar declines during moments of sharp distress: in the lead-up to the 2008 meltdown, after terror attacks, and during the tech sector unwind at the start of the millennium. Each came with unfamiliar policy responses and unclear economic narratives, which are difficult for markets to price instantly. That makes this historical echo unusually important.
Shifting Currency Strategy Frameworks
So, what do we take from all this in practical terms? We’ve reduced reliance on outdated assumptions about inverse equity-dollar relationships. Hedging strategies that rotate purely on S&P turbulence may no longer deliver the same insulation if currency responses aren’t mirroring past behaviours. We’re paying closer attention to fiscal signals out of Capitol Hill, more than the Fed, as spending sentiment now seems to influence the broader dollar trend.
Positioning has become more defensive—not across the board, but selectively. Pairing risk exposure with currencies like the euro or the pound, when indicators suggest US policymakers may let markets bite without policy aid, has offered more consistency than simply chasing volatility spikes. Pricing in a stronger correlation between US policy flexibility and sector-specific performance seems more useful than defaulting to past safe-haven assumptions.
Short-dated options in FX remain active but are being recalibrated. We’ve seen weekly contracts shift farther from historical skew, especially those that used to hinge heavily on Wednesday macro data signals. You can’t bank on equities leading dollar strength anymore. Price action shows that’s not just anomaly-driven—it’s being repriced structurally.
We are reassessing supports in commodities as well. With the dollar only narrowly higher against currencies like the Aussie or loonie, there’s no blanket risk-off rotation into the greenback. This has made us more agile in pairing exposures and less formulaic about volatility proxies. Shorting the dollar directly off risk sentiment has worked better than expected where economic parceling is clearer—especially between regions with commodity-backed growth and those still managing debt overhangs.
In preparation for the coming sessions, we’re watching not only yield spreads but also commentary shifts from finance ministries, not just central banks. If rates are no longer doing the heavy lifting—either because they’re priced in or lack direction—then fiscal cues may take on stronger trading function.
Markets aren’t confused—they’re adapting. We find that patience with legacy correlations won’t pay off in the short run. We’re looking where pricing has reacted not to headlines, but to underlying risk reallocations, recognising that even politically driven developments now carry delayed implications for currency variation.
For us, bid strategies now hinge more on position unwind probabilities than raw macro signal reactions. It’s a slower read, but it’s proven more accurate amid adjusted volatility regimes.
