Trump's Policies Spark 9% Yen Surge, 7% Dollar Drop, $7 Trillion Nasdaq Loss

Traders were caught off guard by the rapid and unexpected shifts in the market landscape in 2025, as Trump's presidency upended nearly every assumption about the economy, inflation, and market strength. The year, which was initially expected to be a period of American dominance driven by Trump's low-tax and high-tariff policies, instead became a year of fear, confusion, and unprecedented price volatility.

The initial fallout was swift and dramatic. Sovereign bonds experienced massive moves, the Japanese yen surged nearly 9% against the dollar, and emerging markets began to attract renewed attention. However, the most significant shock came from the US dollar, stocks, and Trump's own economic agenda, all of which were severely impacted, leaving the market's golden trades nowhere to be found.

At the start of the year, the consensus was that Trump's economic plans would drive inflation higher, prevent Federal Reserve rate cuts, and push the dollar even higher. However, this did not materialize. The US dollar index posted its worst start to a year since 2005, with a deep selloff that had global repercussions. The shock was exacerbated in April when Trump introduced his "Liberation Day" tariffs, which were wide-reaching and aggressive, rattling investor confidence and raising concerns about a potential US recession. Traders began to speculate that Trump might be intentionally weakening the dollar to support domestic industries.

This scenario poses significant challenges for the American government, which relies on foreign investors to finance its substantial debt. A weaker dollar translates to smaller returns for these investors and erodes confidence in US assets. Analysts, including JPMorgan strategist Meera Chandan, suggested that the dollar's diminishing connection to interest rates and equities could indicate deeper structural issues. Her team predicted another 2% drop in dollar strength by the end of the year. Major banks, including Morgan Stanley, Societe Generale, and JPMorgan, had initially expected the dollar to remain strong through the first half of the year, but they were proven wrong as the dollar's value plummeted earlier than anticipated.

Wall Street had placed significant bets on American equities at the beginning of the year, with a focus on artificial intelligence and the strength of the US economy. The Nasdaq 100 was soaring, but this optimism was short-lived. Between February and April, the index lost nearly $7 trillion in market capitalization. The sudden rise of China’s DeepSeek, an AI startup, posed a threat to American tech dominance, and Trump's tariff decisions fueled fears of an economic slowdown. A March survey from Bank of America revealed that fund managers had pulled out of US stocks in record numbers. By April, the bullish sentiment had vanished, with no upside or appetite for risk. However, Trump's decision to pause some of the harshest tariffs reversed the trend, leading to a surge in the S&P 500 and a resurgence in tech stocks, driven by strong earnings and consistent growth. Large investors returned by mid-April and have remained committed.

The volatility highlighted the rapid impact of Trump's policies on market behavior. His tariff decisions initially drove stocks into a downturn, but his subsequent pause on these measures reversed the trend, forcing traders to reassess their strategies. While the US dollar weakened, the Japanese yen strengthened, gaining nearly 9% against the dollar by June. This was driven by the yen's status as a safe-haven currency in times of stress, as well as the Bank of Japan's expected rate hikes in 2025, making it an attractive option for investors seeking stability amidst market turmoil.