Dollar Volatility Hits One-Year Low: "Trump Shock Is Over"

Dollar Index Returns to Pre-Trump Election Levels
Tariff Agreements and Absorption of Tariff Shocks
Impact of Interest Rate Cuts Nearing Their End

The Financial Times (FT) reported on November 9 (local time) that short-term dollar volatility expected by investors has fallen to levels seen before last year's U.S. presidential election.

Dollar bills. Photo by Reuters Yonhap News

According to the FT, the CME Group's "Euro-Dollar CVOL Index" and "Yen-Dollar CVOL Index" surged immediately after Donald Trump was elected president in November last year, but have dropped this month to their lowest levels in a year. The CVOL Index is an indicator that shows the expected volatility for the next 30 days, calculated from the options market. In the foreign exchange market, it serves a similar role to the VIX indicator in the stock market.

Additionally, the Dollar Index (DXY), which measures the value of the dollar against six major currencies including the euro, has also recovered some of its sharp losses from earlier this year and is now close to the level seen just before Trump's election.

Experts have analyzed that the U.S. reaching a series of tariff agreements with major trading partners such as the European Union and China has significantly reduced market uncertainty. Furthermore, the fact that the U.S. economy has withstood the impact of tariffs better than expected, and that major central banks are nearing the end of their interest rate cut cycles, are also considered to have contributed to the stabilization of global financial markets.

Chris Turner, Head of Research at ING, stated, "The world is now learning how to live with Trump," adding, "Investors have also learned to filter the news rather than reacting emotionally to every headline."

Until just before last year's presidential election, the dollar had strengthened on expectations that President Trump's tax cuts and trade policies would boost the economy. However, in April, when President Trump announced plans to impose reciprocal tariffs on various countries, the market was thrown into turmoil, with daily foreign exchange trading volume reaching around 10 trillion dollars.

As a result of the trade war, economic uncertainty increased, and concerns over the Federal Reserve's independence due to President Trump's pressure for interest rate cuts also grew, leading the Dollar Index to its worst performance since the 1970s.

However, since the summer, the dollar has regained its upward momentum. The U.S. stock market hit record highs, boosting investor sentiment, and some large funds began buying dollars, arguing that pessimism about U.S. assets had been excessive.

Robert Tipp, Head of Global Bonds at PGIM, commented, "Claims that U.S. exceptionalism is over are exaggerated," and diagnosed, "The dollar's decline is merely a temporary correction within a bull market, not the beginning of a bearish trend."

It has also been analyzed that the suspension of major economic indicator releases such as inflation, employment, and consumption due to the U.S. federal government shutdown contributed to reducing volatility in both the dollar and the U.S. Treasury market. As market participants lost key reference points, a wait-and-see attitude spread, and as a result, the ICE MOVE Index, which measures U.S. Treasury market volatility, fell to its lowest level in four years.

In this week's report, George Saravelos, an analyst at Deutsche Bank, cited the easing of trade tensions and fiscal policy entering "autopilot" mode, and assessed, "The sharp drop in dollar volatility is a signal from the market that the 'Trump shock' is over."

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