Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/324820 
Authors: 
Year of Publication: 
2025
Series/Report no.: 
AEI Economics Working Paper Series No. 2025-06
Publisher: 
American Enterprise Institute (AEI), Washington, DC
Abstract: 
This paper provides econometric evidence in support of the view that since President Trump's chaotic tariff announcements on Liberation Day, April 2, the dollar has switched from being a safe-haven currency that appreciates in times of market volatility to a "risk-on" currency that moves inversely with volatility. We estimate an equation for daily changes in the DXY dollar index, using as explanatory variables daily changes in US-foreign interest rate differentials and the VIX, a measure of market volatility. We find a significant break in the relationship between the dollar and its primary determinants after Liberation Day, with the dollar falling below its predicted level. More importantly, the sensitivity of the dollar to the VIX has shifted from positive to negative, suggesting that global investors have ceased to treat the dollar as a safe haven in times of stress. Whether this shift in the dollar's behaviour is temporary or permanent, and whether it will start to degrade the dollar's broader dominance in the global financial system, remains to be seen.
Document Type: 
Working Paper

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