Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Trump 2.0 blows up the US dollar
John J. Hardy
Chief Macro Strategist
Summary: As the new Trump administration turns the global financial system on its head with huge tariffs, the world scrambles to find alternatives to the dollar
The globalist system that formed in the ashes of World War II was built on the combination of a US security guarantee to protect trade routes for the “Free World” and the use of the US dollar as the chief currency for transactions and as a store of value. Even after the greenback's link to gold was broken by US President Nixon in 1971, the US dollar continued its domination in the globalised economy.
Cue the 2016 US election and the advent of President Trump, the first president in living memory to bash at the foundations of the global system, demanding tariffs for imported goods to right the huge US trade deficit wrongs and decrying the cost of maintaining the vast US security umbrella. US security alliance partners were shocked, and China was put on notice. But then came the pandemic and a new election brought Biden and encouraged the notion that Trump was an aberration, not the new norm. Then there was the 2024 US election and return of Trump. If Trump 1.0 was the warm-up act for deglobalisation, Trump 2.0 will prove the main event, with all of its consequences for the US dollar.
In 2025, the new Trump administration overhauls the entire nature of the US relationship with the world, slapping massive tariffs on all imports, while slashing deficits with the help of an Elon Musk-run Department of Government Efficiency (DOGE). The implications for the US dollar are dire for trade around the world, as it cuts off the needed supply of dollars to keep the wheels of the global USD system turning, ironically risking a powerful spike higher in the US dollar. Instead, safety valves are found, as global financial actors scramble for alternatives. China and the BRICS+ transact with gold-backed digital money and, to a degree, directly in a new gold-backed offshore yuan. Europe rebases its trading relationships increasingly in the euro. Gold-linked crypto stablecoins add to the mix, as this dramatic new chapter in global financial markets begins.
Potential market impact: The crypto market quadruples to more than USD 10 trillion, the US dollar falls 20% against major currencies and 30% versus gold. The US economy continues to reflate, but wages keep up with goods inflation, as production resources reshore to the US. US exporters advantaged.
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