The US dollar is experiencing a significant rally, driven by the anticipation of new tariffs on countries like Canada, Mexico, and China. This rally is amplifying the slowdown in global excess liquidity, which is the gap between real money growth and economic growth. The market views these tariffs as inflationary within the US, prompting investors to seek the dollar for its perceived safety and potential for higher returns. This shift is creating a headwind for both US and global stocks, as the stronger dollar reduces the availability of capital for investment and diminishes the competitiveness of US exports.
The proposed tariffs, expected to be imposed on February 4th, are seen as growth-retarding for the targeted countries, potentially leading to lower foreign demand for US goods. This scenario further strengthens the dollar due to shifts in trade balances. As a result, US stock futures are down about 1.5%, and global markets are reacting negatively to the potential shock to global growth. The decline in excess liquidity suggests that stocks may underperform bonds, as fixed income returns become more attractive in this environment of financial tightness.
The Bloomberg Dollar Index reached a 27-month high this morning, with the DXY currently priced at 109.45 as of 06:01 on February 3, 2025. This marks a significant increase from its last close of 108.37, nearing its 52-week high of 110.18. The rising dollar continues to pose challenges for stock markets, as it compounds the existing squeeze in excess liquidity.