Trump Trade in retreat?

It’s still early days, of course, but it seems the so-called Trump Trade is already unraveling, and with it, many of the assumptions that shaped global markets over the past several months. When Donald Trump stormed back into the political arena, investors bet heavily on a familiar playbook: tax cuts, deregulation, protectionist tariffs, and a booming stock market fueled by aggressive pro-business policies. Instead, Wall Street is witnessing a sharp selloff, the dollar is weakening, and volatility is rising.

The Trump Trade is in full retreat, and markets are struggling to make sense of a new reality.

Perhaps the most striking development is the dollar’s unexpected decline. Typically, tariffs strengthen a currency by reducing trade deficits and encouraging capital inflows. Yet, despite escalating trade tensions and fresh tariffs targeting China, the greenback has failed to rally. Instead, it is slipping, undermined by a combination of factors including growing skepticism about US economic resilience, rising inflationary pressures, and concerns about America’s worsening fiscal position.

This decline does not look like a short-term fluctuation; it signals a deeper shift. Could it be that investors no longer see the US dollar as the unquestioned safe haven it once was? Political uncertainty, an increasingly fractious global trade environment, and fears of an economic slowdown are eroding the greenback’s appeal. Capital that once rushed into US assets during periods of turmoil is now seeking alternative refuges. Gold, yen, euro, Swiss franc, and even emerging market currencies are gaining ground at the dollar’s expense. The notion that the US remains the ultimate destination for safe haven flows is being challenged for the first time in years.

The evaporation of the so-called ‘Trump put’ — the belief that markets would be protected by business-friendly intervention—has only fueled the uncertainty. Investors had assumed that Trump’s return to power would mean policies aimed at sustaining stock market gains. Yet, with equity markets in freefall and the administration seemingly more focused on protectionism than on reassuring investors, those expectations are being recalibrated. The latest slide in US equities suggests that faith in Trump put is rapidly diminishing.

At the same time, the VIX, Wall Street’s so-called fear gauge, is flashing distress signals. The options market has seen a surge in bets on higher volatility, and the VIX futures curve has inverted—a sign that markets are bracing for near-term distress. The last time we saw such extreme positioning in volatility derivatives was during the February 2018 “Volmageddon” event, when markets were caught in a rapid selloff that forced institutional investors into painful liquidations. Now, with global liquidity already tightening, another volatility shock could be even more destabilising, triggering a broader market correction beyond just equities.

Also, a weaker dollar shifts global capital flows in unexpected ways. Emerging markets, typically battered by a strong dollar due to debt servicing costs, might find some short-term relief. However, any respite could be temporary if escalating trade wars disrupt supply chains and dent global growth. Meanwhile, US Treasuries, historically a magnet for flight-to-safety capital, are behaving erratically, with yields swinging as investors assess economic risks.

And then there’s the looming risk of a carry trade unwind. For years, traders borrowed cheaply in yen and reinvested in higher-yielding US assets, pocketing the difference in interest rates. But with the Bank of Japan finally moving toward rate hikes and the yen strengthening, those leveraged bets are starting to unravel. A rising yen, coupled with US economic uncertainty, would further pressure global equities, particularly in emerging markets that have benefited from easy liquidity. If Japan’s rate hikes force a broader deleveraging, we could see a rapid selloff in risk assets worldwide, similar to the turbulence seen in August last year, but on a much larger scale.

The broader lesson from all this? The retreat of the Trump Trade, the falling dollar, the re-pricing of volatility, and the looming carry trade unwind are not isolated events but interlinked signals of a financial landscape undergoing rapid transformation. And as uncertainty mounts and global capital repositions itself, these trends will define market behaviour in the months ahead. Whether the US administration steps in to steady the ship or allows the market to find its own footing remains to be seen.

But one thing is certain: the retreat of the Trump Trade is now in full motion, and the consequences are only beginning to unfold.