Trump’s first month in office: His affect on the financial markets

It has been one month since Donald Trump’s inauguration at the White House. The returned US president has been fast acting on his pledged policies, including sweeping tariffs, cutting federal workers, initiating a peace talk in the Ukraine war, and so on. While the outcomes of these events remain unclear, some prominent trends in the financial markets have reflected how investors responded to his policy stances. 

A declining US dollar

The US dollar surged from Trump’s election victory on 5 November last year until its peak in early January. However, it has reversed its bullish trend since Trump’s inauguration on 20 January, with the dollar index (DXY) declining 2.2%, from above 109 to 107 as of the market close on 19 February.

Several factors have contributed to the weakening greenback.

First, markets had already priced in a strong dollar before his inauguration, and profit-taking may have caused the pullback. Secondly, he delayed tariffs on Mexico and Canada, as well as reciprocal tariffs on global trading partners. Although he also announced 25% levies on steel and aluminium, possibly extending to car makers, computer chips, and pharmaceutical products, these import duties will not take effect until April. So far, the only tariff actually implemented has been an additional 10% on China, which prompted immediate countermeasures.

As a result, fears of an immediate resurgence in inflation have faded, leading to a reversal in the dollar’s trend. Meanwhile, US government bond yields have also declined since his inauguration for the same reason. Another key factor is that the Federal Reserve signalled it may need to slow down its balance sheet run-offs amid debt ceiling limits. This suggests that the central bank is likely to maintain high levels of government debt, pressuring borrowing costs and, in turn, weakening the dollar.

Record-breaking stock markets

Global stock markets have been on a bullish trend since Trump’s inauguration, particularly European stocks. The delay in imposing sweeping tariffs may have been a key factor supporting risk-on sentiment. However, the underlying fundamentals driving the rally include expectations of lower global interest rates, the ongoing AI frenzy, and positive corporate earnings. Meanwhile, peace talks initiated by Trump with Russia have buoyed European defence stocks.

In fact, the rally in European stock markets has been broad-based, with all sectors gaining over the past month. Markets expect the European Central Bank to continue reducing interest rates and potentially introduce additional special funds for defence spending.

Trump’s policies have also indirectly supported European sectors such as financials, technology, and industrials, leading to broad gains. His announcement to invest $500bn (€479bn) in US AI infrastructure, his pledge to deregulate the banking sector, and his call for the EU to increase defence spending have all contributed to the outperformance of these sectors.

An all-time high for gold

Gold has been an exceptional asset over the past month, with gold futures jumping 8% since Trump’s inauguration. Demand for safe-haven assets has increased due to concerns about a potential global trade war and slowing economic growth. A weaker US dollar has also added to gold’s bullish momentum. Additionally, Trump’s administration cut thousands of federal workers with Elon Musk’s assistance, which may lead to a rise in unemployment and weaker consumer spending.

“So far, that’s been more disruptive to the markets and brought upside risks to inflation and, in the longer term, growth,” said Kyle Rodd, a senior market analyst at Capital.com. “Another key question is how the slash-and-burn approach from DOGE impacts employment and spending.”

Falling oil prices

Crude oil prices have been under pressure since Trump took office last month, with Brent futures down 6.6% and WTI futures slumping 7.8%. This aligns with Trump’s goal of lowering global crude prices, as he called for oil producers to increase production with the slogan “Drill, baby, drill”.

His peace talks with Russia may also involve easing sanctions on the country’s oil exports. He argued that falling energy prices would offset price increases caused by higher tariffs. However, whether this will materialise remains uncertain.

Bitcoin trades sideways

Since Trump’s inauguration, Bitcoin prices have fallen 4% as optimism surrounding his pledge to make America “a crypto capital” has faded.

This may be due to a lack of concrete policy catalysts. So far, Trump has only announced that his administration will evaluate whether to create a “national digital asset stockpile”. However, he did not specify a Bitcoin reserve, which may have been a disappointment for Bitcoin enthusiasts.