Currency Woes Put Pressure on US Equities and Bonds 22Apr2025

 

Currency Woes Put Pressure on US Equities and Bonds 22Apr2025

 

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(This is for information purposes only. This should not be construed as a recommendation or investment advice even though the author is a CFA Charterholder. Please consult your financial adviser before taking any investment decision. Safe to assume the author has a vested interest in stocks / investments discussed if any.)

 

 

There are a few prevailing market narratives gaining traction. One suggests that when the US dollar comes under pressure, investors tend to offload US Treasuries. Another holds that global investors are drawn to appreciating currencies, and subsequently channel capital into assets denominated in those currencies.

Recently, a sharp decline in the US Dollar Index has coincided with a selloff in US stocks and US Treasuries, fueling both narratives.

Let’s examine these claims using data on annual changes in US stocks, US bonds and the US Dollar Index.

As a refresher, the US Dollar Index (DXY or USDX) measures the value of the US dollar against a basket of six major currencies: the Euro, British Pound, Japanese Yen, Canadian Dollar, Swedish Krona and Swiss Franc.

A rising DXY indicates a strengthening dollar relative to this basket, while a falling DXY reflects a weakening dollar.

 

Market narrative 1:  A weak dollar leads to sell-off in US Treasuries

  

As mentioned above, a weak dollar means DXY is declining. Sell-off in US Treasury securities means Treasury prices are falling and bond yields are rising. There is inverse relationship between bond yields and bond prices: if bond prices fall, yields rise and vice versa.

 

Year-to-date, the US 10-year Treasury yield is down 16 basis points (100 basis points equal one per cent) to 4.41 per cent now. But there is massive volatility in the yield in the past four months or so. 

In the second week of Jan2025, it surged to a high of 4.80 per cent before falling to 4.18 per cent in the first week of Mar2025. It again rose to 4.37 per cent by the fourth week of Mar2025 and fell to 4 per cent in the first week of Apr2025.

 

Again the 10-year Treasury yield climbed to 4.5 per cent by second week of Apr2025 before falling to 4.28 per cent in the next five days. The yield is now at 4.41 per cent. 

 

It is too much volatility for investors to stomach. 

Uncertainty on Trump tariffs and reciprocal tariffs is causing investors to resort to massive speculation in US Treasuries. They are considered as the safest (safe haven) assets globally. At least until now.

 

The uncertainty brought by Trump's trade, economic, military and political policies has induced higher volatility in global financial markets lately. This has led to a dent in confidence of the US in general and the Trump administration in particular. 

The data chart below show changes in global stocks, currencies, bonds, Bitcoin and commodities year to date, that is between the end of Dec2025 and now.

 

In the past few months, there has been pressure on US stocks with investors selling dollar assets and moving to European and Chinese stocks – this is reflected in year-to-date data of global indices. 

 

In fact, the US stocks are one of the worst performing stocks among major stock markets globally this year. The US dollar index (DXY) has been weak this year, down 9.4 per cent year to date. German DAX 40 is up 6.5 per cent YTD, Hang Seng is up 6.3 per cent and India’s Nifty 50 is up 2 per cent – but S&P 500 is down 12 per cent and Nasdaq Composite is down a staggering 17.8 per cent.

Year to date, gold and silver are doing well – with gold delivering a return of 31.8 per cent, whereas silver chipped in with 11.4 per cent. Bitcoin too is holding up well though it’s down 5.7 per cent YTD. 

 

British Pound and Euro are up 7.2 and 10.6 per cent respectively versus the US dollar; and the USD is down 10.6 per cent versus the Japanese Yen. In contrast, the Chinese Yuan and Indian rupee are almost flat this year.

 

 

Financial markets have been focusing on movements in global markets, especially since Trump's reciprocal tariffs announced on 02Apr2025 -- meaning they have been focusing on a narrow period of just three weeks, which may not be a benchmark for long term investors.

 

Now, let us see how the market narrative 1 holds up over long periods. 

The chart below presents yearly changes in data for 11 years between 2014 and 2024 consisting of US stocks (S&P 500 and Nasdaq Composite), the US 10-year bond yield, DXY, movement in DXY versus the Treasury yield, and movement in DXY versus the US stocks.

 

(It may be noted for the sake of simplicity, we ignored changes in the Federal Funds rate or Fed rate or the monetary policy stance of the US Federal Reserve.)

 

 

As show in the above chart:

 

Whenever, there is a rise in DXY in a particular year, the US 10-year yield tends to rise (there may be other reasons too for changes in bond yields -- like, demand for and supply of new bonds, global economic conditions, US fiscal deficit, US trade imbalances, geopolitical risks, wars, changes in Fed funds rate and inflationary expectations). 

Of the 11 years between 2014 and 2024, the market narrative 1 does not hold true for eight years, namely in, 2024, 202o to 2022 and from 2015 to 2018 (see above graph highlighted in light green against DXY & Treasury yield direction). 

 

As per market narrative 1, a weak dollar leads to fall in US Treasury prices. Instead, on eight occasions out of a total 11 observations, the narrative does not hold. 

 

For example in 2020 and 2017, DXY was weak with falls of 7.4 and 9.8 per cent respectively. But bond prices rose (yields falling by 100 and 4 basis points respectively in 2020 and 2017). 

 

On six occasions (see the above graph), a rise in DXY is coincided with surge in US 10-year Treasury yield. For example, in 2022, DXY was up 8.2 per cent, but the US 10-year was up 237 basis points, leading to fall in bond prices.

 

In 2021, the dollar index increased by 6.4 per cent and the bond yield went up by 59 basis points, leading to fall in bond prices.

You can check the data for other years, like, 2024, 2018, 2016 and 2015.

In 2014, there was opposite trend -- the DXY rose by 12.6 per cent, but the US 10-year bond yield was down by 86 basis points -- meaning the rise in DXY coincided with rise in bond prices. In 2019 and 2023, the data showed a mixed picture, there was hardly any discerning movement in the DXY.

 

Conclusion on Market Narrative 1: The data does not support the narrative that a weakening dollar leads to a sell-off in US Treasuries (bond yields rising and concomitant fall in bond prices). 

 

There are several years in which a rise in yields (conversely, a fall on bond prices) coincided with a stronger dollar. In two years (2020 and 2017), a weak dollar coincided with rising bond prices (falling yields).

 

This indicates that factors other than the dollar's strength, such as inflation expectations, Federal Reserve policies, US trade imbalances and global economic conditions play a more significant role in influencing Treasury yields.​
 

The relationship between the dollar and Treasury yields is complex and influenced by a multitude of factors. Investors should consider a broad range of economic indicators and policy developments when assessing the outlook for US Treasuries.

 

 If you want to check global market data (of stocks, bonds, commodities, Bitcoin and currencies) for calendar years from 2012 to 2024, you can check the images presented in this blog.

 

Additional input:

 

It may be a good idea to look at other bond market indicators to look at the health of the US Treasury market. In a given year, the US 10-year Treasury yield may have gone up, but that does not mean that automatically results in loss for bond investors.

 

Bond prices are influenced by the rise or fall in bond yields and income from coupons. In some years, bond yields may rise but the concomitant fall in bond prices may be more than compensated by higher coupons -- leading to positive annual returns for bond investors.

 

The following chart shows Bloomberg US Aggregate Bond Index annual returns: With the help of the chart, you can see even though US bond yields rise in certain years, the overall returns may be positive for bond investors.

The bars in the chart show the total return for the Bloomberg US Aggregate Bond Index each year since 1976, the inception of the index.

Returns are based on total return. Intra-year drops refers to the largest market drops from a peak to a trough during the year.

JP Morgan Guide to the Markets: US Data are as of March 31, 2025.

 

 

 

Market narrative 2:  A weak dollar leads to sell-off in US Stocks

  

Market narrative 2: It goes like this: a rising dollar index is good for US assets, like, US stocks, US private equity and others. Investors are attracted to assets and currencies that are showing strong rising trend.

How does this view hold in actual practice? Let us see yearly data for the past eleven years between 2014 and 2024.

 

 

The data in the past 11 years present a mixed picture. In five years, the DXY and US stocks moved in the opposite direction. The years are 2023, 2022, 2020, 2018 and 2017. For example, in 2023, DXY was down 2 per cent whereas S&P 500 and Nasdaq Composite were up 24 and 43 per cent respectively. In 2018, DXY was up 4.1 per cent, but S&P 500 and Nasdaq were down 6 and 4 per cent down respectively. 

 

In 2020 and 2017, DXY fell by 7.4 and 9.8 per cent respectively -- but in both years, the US stocks (S&P 500) delivered positive returns of 16.2 and 19.4 per cent respectively.

 

In four years (that is, 2024, 2021, 2016 and 2014), both the DXY and US stocks moved in the same direction. For example, in 2021, DXY was up 6.4 per cent, whereas S&P 500 and Nasdaq were up 26.9 and 21.4 per cent respectively. 

Even this market narrative 2 does not hold true in all the years.

Gold has been doing extremely well in the past 18 months. It has hit all-time highs many times recently. 

 

If they want to attract capital, what money managers do is they look for indicators that are moving and try to connect them and weave a narrative even though there may not be any fundamental basis for such opinions.

 

 

Takeaway on market narrative 2:

The DXY-stock market relationship is not dependable as a standalone signal. It’s influenced by broader macro forces: interest rates, earnings growth, inflation expectations, geopolitical stress and other variables.

A rising dollar might help US financial assets attract flows, but it can hurt exporters and multinational corporations' profits. Gold’s strength implies deeper concerns or hedging motives — possibly against currency debasement, Trump tariff tantrums, inflation, or systemic risk.

Investors should treat DXY as a secondary indicator and focus more on market liquidity, earnings growth, and Fed policy for equity positioning.

 

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Disclosure:  I've got a vested interest in Indian stocks and other investments. It's safe to assume I've interest in the financial instruments / products discussed, if any.

Disclaimer: The analysis and opinion provided here are only for information purposes and should not be construed as investment advice. Investors should consult their own financial advisers before making any investments. The author is a CFA Charterholder with a vested interest in financial markets.

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