Global stock markets rallied after the U.S. and China agreed to a 90-day trade truce in May 2025. Tariffs were significantly lowered, with the U.S. cutting its rates from 145% to 30%, and China reducing theirs from 125% to 10%. This eased investor fears and temporarily restored confidence across major indices.
The truce followed two days of trade negotiations in London, where both sides discussed a more permanent resolution. Key issues included U.S. restrictions on semiconductor exports and China’s control over rare earth materials critical for U.S. high-tech manufacturing.
While the U.S. economy remained resilient—supported by a strong jobs report and moderate inflation—China’s economy continued to weaken. Export figures fell sharply, and producer prices dropped at the fastest rate in nearly two years, despite previous stimulus efforts. This suggests that the trade war has exacerbated China's ongoing slowdown.
The U.S. Federal Reserve chose to hold interest rates steady, opting to monitor how the trade war might influence inflation and consumer prices before making its next move.
Is the Dollar Losing Its Dominance?
On May 16, 2025, Moody’s downgraded the U.S. credit rating by one notch from Aaa to Aa1, citing concerns over ballooning debt and rising interest payments. This followed similar downgrades by Fitch in 2023 and S&P in 2011.
The downgrade was triggered by a controversial Republican-backed tax cut and spending bill projected to add $2.4 trillion to the deficit over 10 years. Elon Musk publicly criticized the bill as a “disgusting abomination,” sparking a highly publicized spat with President Donald Trump. While this had limited impact on markets overall, Tesla’s stock experienced short-term volatility.
Projections suggest U.S. federal debt could rise to 134% of GDP by 2035 (from 98% in 2024), with the deficit widening to nearly 9% of GDP. This is largely due to growing entitlement costs, interest payments, and reduced tax revenue.
At the same time, the U.S. dollar’s long-standing dominance is slowly eroding. Its share of global reserves has fallen from over 70% in 2000 to 57.8% in 2024. A sharp selloff in April 2025 contributed to an 8% year-to-date drop in the dollar index.
This shift is partly driven by concerns that the dollar is being used as a strategic tool in trade and sanctions. Investors are now reassessing portfolios that are overly concentrated in USD assets.
Rise of Regional Currencies and Hedging Behavior
The move away from the dollar is gaining momentum, especially in Asia. ASEAN recently unveiled its Economic Community Strategic Plan (2026–2030), which aims to increase the use of local currencies in trade and investment. The plan emphasizes reducing reliance on the dollar and minimizing exchange rate shocks through regional payment systems.
The BRICS nations, led by China and India, are also working on alternative systems to bypass SWIFT and settle bilateral trade in local currencies—especially in yuan. At the same time, large investors in Asia are increasing FX hedging on their USD exposures. This involves selling U.S. dollars and buying local currencies to manage risk.
Still, this trend may be cyclical. Looking at a 20-year chart, the current USD depreciation is not unprecedented. Despite periods of weakness, the dollar has consistently retained its position as the world's top reserve currency—thanks to its unmatched liquidity and depth in bond and credit markets.
Meanwhile, the Republican Party’s longstanding stance on limited government and fiscal responsibility could pose a roadblock to the current spending bill. Although the bill has passed the House, it must still gain approval in the Senate, where Republicans hold a slim majority. Any internal dissent could force the bill to be renegotiated or delayed.
More than half of global trade is still invoiced in U.S. dollars. While diversification into assets like gold, bitcoin, or other currencies (such as the euro, yen, or yuan) may present tactical opportunities, a full dethroning of the dollar remains unlikely in the near term. A normalization of global trade relations after the Trump administration could also reverse the recent momentum behind alternative assets.
Portfolio Performance & Strategy
The portfolio well during the period, posting strong returns of +2.87% (Cash), +3.14% (CPF-OA), and +2.99% (SRS). Gains were driven by U.S. financials, small-cap stocks, and the technology sector, which benefited from easing trade tensions and improving sentiment around growth. The worst-performing sector was U.S. healthcare, which came under pressure amid concerns over potential tariffs on pharmaceutical ingredients.
I expect market sentiment to remain cautiously optimistic as more trade agreements are finalized, with particular focus on deals involving China, the EU, Japan, and India. These are likely to be the most market-positive, especially in sectors exposed to global trade. Trump is also under growing pressure to deliver results as the threat of a major trade war recession looms. His next moves could be critical in shaping his legacy.
However, risks remain. The next major event to watch is the July 8 expiry of the 90-day global tariff pause—any failure to extend it could trigger renewed market volatility. Additionally, tensions between the EU and U.S. are escalating, posing another risk to global trade stability. On a more positive note, China has made progress by establishing a trade framework with the U.S., which has eased short-term concerns and could provide support for Chinese equities in the coming weeks.
The portfolio remains well-positioned to benefit from these developments, and I continue to monitor the evolving landscape closely, ready to make tactical shifts should conditions change.
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