Trump Is Undoing Trades He Pushed as Oil, Yields, Dollar Surge

Bloomberg) -- Until the conflict with Iran broke out, President Donald Trump was getting — by design or by chance — what he appeared to want in three pivotal financial markets: lower oil prices and Treasury yields, and a weaker dollar.

The air strikes that the US and Israel launched over the weekend, and Iran’s counterattacks, are unraveling that. Crude prices have soared as war enveloped the Mideast, ramping up inflation concerns and complicating the Federal Reserve’s path to cutting interest rates again.

Treasury yields have jumped as a result, counter to the administration’s stated wish for lower rates on the 10-year note — a benchmark for loans to companies and home-buyers.

The greenback, meanwhile, has reclaimed its status as the ultimate haven asset, gaining against almost all world currencies. If that trend persists, it could make American exports less competitive and undermine Trump’s agenda of bolstering the manufacturing industry.

US stocks have mostly held up this week. But the peril for the president is that a protracted war leaves energy prices elevated, weakening the investment outlook and consumer sentiment at a time when Democrats are focusing on the issue of affordability as they seek to retake Congress.

“These unintended consequences pose a speed-brake on what Trump can achieve, particularly in a midterm year,” said Mina Krishnan, a portfolio manager at Schroder Investment. “The barometers he cares about are the S&P 500, gas prices and mortgage rates. He’s attributed his success to these metrics, which means he’s now tied to any failures.”

It’s hardly the first time Trump has upended markets this term, and the reaction this week has been far more tempered than after his April rollout of steep tariffs. The big difference now, however, is that with the war he’s helped unleash, Wall Street is warning Trump may have a tough time containing the fallout.

2022 Scenario

The Bloomberg Dollar Spot Index has gained more than 1% this week, while 10-year yields are up roughly 20 basis points. Both are still solidly down from when Trump took office last year, in no small part because of the impact of Trump’s policies — and the uncertainty around them — on the labor market.

In January, Trump said he was comfortable with the US currency’s recent declines, strengthening the market perception that the administration wants a weaker greenback to boost US exports. The currency tumbled on the comments, before recovering after Treasury Secretary Scott Bessent touted a strong-dollar policy.

As the fighting drags on, investors are already referencing the nightmare scenario of 2022. That’s when crude prices soared above $100 per barrel after Russia invaded Ukraine, contributing to an inflationary backdrop that led the Fed to start hiking rates aggressively, boosting the dollar and fueling steep losses in bonds and stocks.

For now, traders view that outcome as a tail risk rather than a base case. The S&P 500 Index rose Wednesday and the dollar fell on a report that Iran had reached out indirectly to the US to negotiate — a claim Tehran denied. Then on Thursday, as the war entered a sixth day, oil, yields and the dollar climbed again, while stocks dropped.

The price movement is “consistent with a market which is pricing a relatively short ‘time under conflict’ for the Iran situation,” said Scott Ladner, chief investment officer at Horizon Investments.

If anything, assets in the US — a net oil exporter — have held up better than many parts of Europe and Asia that rely heavily on energy imports. US equities, for instance, have outperformed the rest of the world this week by the widest margin since April.

‘Plummeting’ Inflation

Still, with oil prices up more than 10% this week, domestic inflation pressures are again in focus. In his State of the Union address last month, Trump touted falling gasoline prices and claimed inflation was “plummeting.”

The oil spike also works against his goal of lower government borrowing costs. Trump has been relentless in pressing the Fed to lower rates, in part to reduce the roughly $1 trillion annual cost of servicing the federal debt burden.

Yet since the war began, traders have trimmed expectations for Fed easing. They’re now less confident the central bank will deliver two quarter-point cuts this year, whereas on Friday they were even leaning toward three such moves by year-end.

“The war could dent hopes for lower inflation and lower rates,” said Ayako Yoshioka, director and senior investment strategist at Wealth Enhancement Group.

This week marks a stark reversal for the Treasury market, which is coming off a strong month. Benchmark yields touched their lowest levels in months in February as investors sought shelter from volatility in stocks, while tension between the US and Iran mounted.

Then on Monday, after fighting erupted and oil prices soared, 10-year Treasuries slid the most since October — bad news for Bessent’s favorite bond-market metric.

“Market moves reflect geopolitical realities,” said Ed Yardeni, president of Yardeni Research. “And they don’t always align with domestic policy goals.”