The Trump Factor: Dollar Volatility and Market Stability in the Shadow of 1987

The 1987 stock market crash, often referred to as "Black Monday," and the Trump-era market dynamics share unsettling parallels in their interplay of currency weakness, trade policies, and systemic financial fragility. While the 1987 crash was a product of speculative excess and program trading, the Trump era has introduced a new layer of geopolitical and monetary uncertainty. For equity investors, understanding these historical echoes is critical to navigating a world where dollar volatility and trade tensions increasingly shape market stability.

1987: The Dollar's Fragile Strength and the Plaza Accord

In the years leading up to the 1987 crash, the U.S. dollar was at its peak, buoyed by the Plaza Accord of 1985—a coordinated effort by the G5 nations to weaken the greenback against the yen and deutsche mark. The dollar's strength, however, was a double-edged sword. By 1987, the U.S. trade deficit had widened to 3.1% of GDP, fueling concerns about the sustainability of the dollar's value. Treasury Secretary James Baker's public threats to devalue the dollar in late 1987 further stoked market anxiety.

The Federal Reserve, under Alan Greenspan, initially maintained a tight monetary policy to combat inflation but shifted to liquidity injections during the crisis. This pivot highlighted the Fed's role as a stabilizer, yet structural flaws—such as mismatched settlement periods for stocks and derivatives—amplified the crash's severity. The result was a 22.6% one-day plunge in the Dow, driven by program trading and portfolio insurance strategies that created a self-reinforcing cycle of selling.

Trump's Dollar and Trade Policies: A New Kind of Volatility

The Trump administration's approach to the dollar and trade has mirrored these dynamics in unexpected ways. By 2025, the U.S. dollar index (DXY) had fallen over 10% from its 2017 peak, driven by aggressive tariffs, a proposed "Mar-a-Lago Accord," and eroding confidence in U.S. Treasuries as a safe-haven asset. Unlike the 1987 Plaza Accord, which aimed to stabilize the dollar, Trump's policies sought to weaken it intentionally, leveraging trade disputes and security assurances to force a depreciation.

The administration's tariffs, however, have had mixed results. While the bilateral trade deficit with China fell from $419 billion in 2018 to $311 billion by 2020, overall trade deficits with countries like Vietnam and Germany expanded. Tariffs also raised costs for U.S. businesses and consumers, with $74.4 billion in tariffs collected in 2020—largely offset by retaliatory measures against U.S. exports. Meanwhile, the Fed's independence has been called into question, particularly after the 2025 executive order asserting control over all regulatory measures except monetary policy. This undermines the central bank's credibility, a stark contrast to the Fed's decisive actions in 1987.

Currency-Driven Equity Risk: Then and Now

Both periods reveal how currency fluctuations can amplify equity risk. In 1987, a strong dollar exacerbated trade deficits and fueled speculation about its sustainability. Today, a weak dollar under Trump has triggered a shift in investor behavior, with capital fleeing U.S. Treasuries to alternatives like gold, the Swiss franc, and the euro. This shift has created opportunities for the European Union to issue common euro-denominated bonds, challenging the dollar's "exorbitant privilege."

For investors, the lessons are clear. In 1987, hedging strategies like portfolio insurance backfired, worsening the crash. Today, the risks are different but no less urgent. Rising geopolitical tensions, such as the U.S.-China trade war and Trump's threats to punish countries seeking alternatives to the dollar, heighten the likelihood of sudden market corrections.

Hedging Strategies in an Age of Uncertainty

To mitigate currency-driven equity risk, investors should adopt a multi-layered approach:
1. Diversification Beyond the Dollar: Allocate assets to non-U.S. equities and commodities (e.g., gold, oil) to hedge against dollar weakness. The EU's potential issuance of euro-denominated bonds could provide a safe alternative to Treasuries.
2. Dynamic Hedging: Use options and futures to hedge against both currency swings and equity declines. Unlike the rigid portfolio insurance of 1987, modern tools allow for more flexible, market-sensitive strategies.
3. Geopolitical Risk Analysis: Monitor trade policies and central bank interventions closely. Trump's 2025 executive order on the Fed underscores the importance of assessing policy credibility when evaluating long-term investments.

Conclusion: Learning from History Without Repeating It

The 1987 crash and the Trump-era market turbulence share a common thread: the interplay of currency policy, trade imbalances, and systemic fragility. While the 1987 crisis was resolved through coordinated global action and regulatory reforms, the Trump era lacks such coherence. Investors must remain vigilant, balancing historical insights with the unique challenges of today's geopolitical and monetary landscape.

For now, the dollar's volatility and Trump's trade policies suggest a market environment where caution and adaptability are paramount. As the EU and emerging markets increasingly challenge U.S. financial dominance, the era of the dollar's unshakable hegemony may be ending—a reality investors must prepare for, not with fear, but with strategic foresight.