Dollar under pressure as investors grow wary of US assets

The US dollar and stocks retreated on Wednesday as investors and UK-based Forex brokers grew increasingly concerned over President Trump's economic policies and ability to push through tax cuts.

Tax cuts face opposition while trade talks stall

With the US facing high debt levels already, President Trump's proposed tax cuts risk adding another $3-5 trillion over 10 years.

This proposal is facing opposition even within his Republican party over measures that would cut healthcare and food benefits for low-income households.

At the same time, trading partners are pressing for progress on trade talks and elimination of tariffs.

But a lack of progress on US trade negotiations continues to disappoint investors.

"People are looking at the idea of moving capital out of the US, and it's certainly not a mass exodus, but people are looking at the opportunities in some of these other markets again."

- Chris Weston, Pepperstone

Treasury yields rise while stocks and the dollar retreat

The uncertainty around US economic policy has driven a sell-off in stocks and bonds along with the US dollar:

• Treasury Yields - The yield on 30-year bonds hit 5%, a psychological threshold that signals declining demand for long-term US debt
• US Stocks - Futures declined nearly 1% in European trading as tax cut opposition mounted
• Dollar - Accelerated selling against safe havens like the yen and Swiss franc

Dollar strength is normally supported by rising Treasury yields. But that typical correlation has broken down recently amidst policy uncertainty.

Safe havens offer shelter as investors seek alternatives

With investors growing more wary of US assets, safe havens have rallied:

Yen, Swiss Franc - Hit two-week highs against the dollar

Gold - Rose 0.7% to surpass $3,300/ounce

Investors also looked to assets in Europe and Asia for alternatives. The British pound got a boost from British inflation coming in higher than expected.

Other key market drivers to watch

While US policy remains the primary concern, other factors drove market movements on Wednesday:

• Oi - Rose over 1% on geopolitical tensions between Israel and Iran
• Japan Bonds - Remained under pressure as the BOJ tries to normalize policy
• British Earnings - Marks & Spencer reported a hit from a recent cyberattack
• G7 Summit - Monitored for commentary on using a weaker dollar to aid trade

Politics, monetary policy, growth, and corporate health will keep the interplay going, and this will continue to drive volatility across regions and asset classes.

It could also encourage further rebalancing towards markets in Europe and Asia as the US struggles to line up policy with its debt obligations.