Stagflation Fears Mount: Powell’s Pause and Trump’s Silence Hit US Dollar Hard
ACY Securities - Jasper Osita
Overview
Fed Holds, But Tariffs Complicate Outlook: The Fed signaled a pause on rate moves, but tariff effects could keep inflation sticky.
- Powell flagged uncertainty from tariffs, delaying any move to cut rates.
- Fed’s tone suggests a cautious approach amid mixed economic signals.
Stagflation Risk Returns with New Tariffs: Tariffs on Chinese goods raise fears of inflation without growth.
- Higher import costs and supply disruptions weigh on sentiment.
- Investors increasingly wary of a stagflation-style environment.
White House Silent as Dollar Declines: Trump administration shows no urgency to defend dollar weakness.
- A weaker dollar boosts exports and offsets tariff impacts.
- Market views the silence as a tacit nod to a softer USD policy.
Bonds Lose Safe-Haven Role: U.S. 10-year yields underperform despite rising risk aversion.
- Investor confidence in U.S. assets is slipping.
- Europe and Japan see increasing capital inflows instead.
U.S. Dollar Faces Renewed Pressure Amid Policy Caution and Trade War Tensions
The U.S. dollar navigated a turbulent path this past week as Fed Chair Jerome Powell signaled caution on future rate moves, even as tariff shocks reignited stagflation fears.
While the dollar held ground early in the week, a sharp pullback across major pairs by Friday highlighted growing investor discomfort with the U.S. growth outlook and the Fed’s response to external shocks.
Powell's April 16 Speech: The Fed Steps Back, But Doesn't Blink
On April 16, Chair Jerome Powell delivered a closely watched speech at the Economic Club of Chicago, signaling the Fed’s preference to hold rates steady at 4.25–4.50% for now.
“The effects of recent tariff increases are still evolving... and the economic consequences could be larger than anticipated.”
— Jerome Powell, April 16, 2025
Key points from the speech:
- The Fed views headline inflation as softening, but warned tariffs could cause a temporary inflation spike that may become persistent.
- Powell stressed the need for more clarity before cutting and defended Fed independence amid rising political pressure.
- The labor market remains solid, but growth and sentiment indicators are turning – reasons enough for a cautious policy stance.
Stagflation Fears
The tariffs present a double-edged sword: higher import costs (inflationary) and disrupted supply chains (growth-negative). This has sparked talk of stagflation – a nightmare scenario for policymakers. The Fed is particularly concerned that the tariff-driven price spikes could become “persistent” if they seep into expectations
Daily
4-Hour
As the US market continue to lose traction amid trade wars and losing appeal due to turbulent geo-political tensions, primarily, with China and its counterparts in Europe, the Dollar keeps losing ground with no signs of stopping with 97.685 on the horizon.
Trump’s Silent Nod to a Weaker Dollar: Strategic or Negligent?
One of the underlying currents dollar’s selloff is the absence of concern from the White House. Despite rising market volatility, weakening consumer sentiment, and inflation uncertainty, the Trump administration has shown no urgency to defend the dollar’s strength. In fact, this may be part of the plan.
Trump Has Always Favored a Weaker Dollar
Donald Trump has repeatedly expressed discomfort with a strong U.S. dollar, calling it a disadvantage for American exporters and manufacturers. In fact, throughout his political career, Trump has accused other nations — especially China and the EU — of currency manipulation to gain trade advantages. His solution?
- A weaker dollar makes U.S. exports more competitive, helping domestic manufacturers and reducing the trade deficit.
- It also dulls the impact of tariffs, since a lower USD can partially offset the price hikes from imported goods.
- Trump has often criticized the Fed for keeping the dollar "too strong," calling it a disadvantage in global trade.
US-10 Year Government Bonds: Losing Appeal with US Dollar
Normally, with a weak US outlook, investors would flock to bonds, pushing bonds to new highs. In this case, bonds are not doing what it is supposed to, to be a safe-haven when the US market is in turmoil.
Bonds are not gaining ground amidst the US market losing appeal which is concerning.
Strategic or Shortsighted?
The U.S. has recently imposed 125% tariffs on Chinese goods, reigniting fears of stagflation — rising prices and slowing growth. This would normally call for coordinated reassurance to markets, especially from policymakers.
But there’s no indication that Trump wants to defend the dollar. Why?
- A weaker USD offsets some of the tariff costs for foreign buyers — keeping U.S. goods competitive abroad despite higher prices.
- It also helps reduce the trade deficit, a political flashpoint for the Trump base.
- Trump’s past pressure on the Fed to keep rates low and weaken the dollar shows he views a soft greenback as a strategic economic lever.
This week, as Fed Chair Powell delivered a cautious message, opting for a “wait-and-see” stance on policy due to tariff uncertainty, the dollar sank — but not a word of concern came from the White House.
What This Means for You
This lack of defense suggests a higher tolerance for a weaker dollar, at least until it becomes chaotic. That shift has critical implications for how the USD may trade in the weeks ahead:
- USD softness is not just market-driven — it’s policy-aligned.
- Don’t expect intervention or concern unless the dollar decline becomes disorderly.
- Shift to Export-driven currencies (EUR, JPY, CAD, CHF) which may continue to outperform with looming de-dollarization.
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