Triple Surge in Dollar, Bonds, and Oil... 'Trumponomics' Disrupted by Middle East War

Following the U.S. and Israeli airstrikes on Iran, Bloomberg News assessed the market's direction on the 5th (local time) with this statement. After the attack, U.S. Treasury yields have surged, running counter to the Trump administration's plans to lower the 10-year Treasury yield, which serves as a benchmark for corporate loans and homebuyers' mortgages.

The U.S. dollar is strengthening against nearly all currencies. If this trend continues, President Trump's agenda to revive manufacturing by boosting the competitiveness of American exports could lose momentum.

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Bloomberg News reported that the prolonged surge in energy prices due to the ongoing war poses a crisis for the Trump administration. The Democratic Party is targeting the administration over the burden of living costs and rising prices, and soaring oil prices inevitably dampen investment prospects and consumer sentiment.

Mina Krishnan, portfolio manager at Schroders Investment, said, "These outcomes are putting a sudden brake on the goals Trump is trying to achieve in a midterm election year." She continued, "The indicators President Trump cares most about are the S&P 500 Index, gasoline prices, and mortgage rates. When these indicators performed well, he took credit, but if they worsen, he will be held accountable."

The Bloomberg Dollar Spot Index has risen 1.4% so far this week. If this trend continues, it will mark the highest weekly increase since November 2024. The yield on the 10-year Treasury bond has climbed by about 20 basis points (1bp = 0.01 percentage point).

As the Middle East war shows signs of dragging on, investors are recalling the fears of 2022. At that time, Russia's invasion of Ukraine pushed oil prices above $100 per barrel (about 147,560 won), prompting the Federal Reserve (Fed) to rapidly raise interest rates. This resulted in a strong dollar and crashes in both bond and stock markets.

The market is wary of such a worst-case scenario but considers the chances of it actually happening to be low. On the 4th, when reports emerged that Iran was seeking negotiations with the U.S., stock prices rose and the dollar fell. Although the Iranian side immediately denied this and the market froze again within the day, these fluctuations indicate that investors still expect the war to be short-lived.

Scott Ladner, Chief Investment Officer (CIO) of Horizon Investments, said, "Market movements are reflecting expectations that the Iran situation will be resolved in a relatively short period of time."

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U.S. crude oil futures prices have soared to their highest level in 20 months. West Texas Intermediate (WTI) jumped 8.5% to close around $81, while Brent crude surpassed $85. This reflects investors' concerns that the Middle East conflict will be prolonged.

The inflationary pressure from rising oil prices has intensified once again. This situation is in stark contrast to President Trump's remarks in last month's State of the Union address, when he touted plunging gasoline prices and claimed that inflation was "plummeting." The spike in oil prices also hampers his goal of reducing government borrowing costs. President Trump has been pressuring the Fed to cut interest rates in order to reduce the annual federal debt interest burden, which amounts to about 1 trillion dollars.

As oil prices surge, expectations for Fed rate cuts have significantly diminished. Until last week, the market was projecting three rate cuts by year-end, but now there is uncertainty even about two rate cuts this year.

This week has also brought a sharp reversal to the previously strong Treasury market. Last month, investors flocked to Treasuries as a hedge against stock market volatility and Middle East tensions, pushing yields to their lowest in months. However, as fighting intensified and oil prices spiked on the 2nd, the price of 10-year Treasuries saw its biggest drop since October last year.

Skylar Montgomery Koning, a strategist at Bloomberg, said, "The U.S. becoming a net energy exporter has changed the market's landscape. Now, the dollar does not absorb external shocks, but rather amplifies them." She added, "Rising oil prices tend to improve the U.S. trade balance, making the dollar even stronger."

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