Trump's trade offensive threatens America's financial primacy

Financial markets have flashed an ominous message this month about President Trump's ambitious and improvisational bid to reshape global trade: Be careful what you wish for.

- Nick Timiraos, Jack Pitcher & Chelsey Dulaney

Volatility in Treasury markets and unexpected weakness in the dollar suggest that what began as a trade conflict could morph into a more dangerous "capital war." The clash threatens to raise U.S. borrowing costs by undermining Washington's long-standing financial primacy, which for years has drawn trillions of dollars of foreign funds into the country.

"This idea that you can break trade, and not break the capital flow side, is a fantasy," said Steven Blitz, chief U.S. economist at GlobalData TS Lombard.

Markets have settled down in recent days as Trump pulled back from a maximalist stance on tariffs. Volatility soared after the president unspooled his fluid and unpredictable trade policy on April 2. The White House paused tariff hikes on some of the nation's largest trading partners hours after they took effect on April 9, but then ratcheted up tariffs to eye-watering levels on China.

A brutal bond-market selloff unfolded, with 30-year yields notching their largest weekly increase since 1987 despite decent bond auctions. The selloff occurred against the backdrop of a weakening dollar, which normally strengthens during bouts of stress. The abnormal combination prompted some analysts to warn about the whiff of capital flight from the U.S.

Some of the market dislocation reflected hedge funds and other large investors forced to unwind certain trades that became unprofitable. Treasury Secretary Scott Bessent has said the selloff largely reflected technical factors—how investors' risk-management strategies, such as "Value-at-Risk," forced sudden and one-time liquidations as correlations between different assets changed unexpectedly.

"This is one of those occasional 'VAR' shocks that you get in the trading community. I think a lot of people got very leveraged, maybe out over their skis," Bessent said on Bloomberg Television this month.