S&P 500 Vs US Dollar: While Equities Take The Tariff Punch, Greenback Sheds Tariff Fears: 'Both Can't Be Right,' Says Former Goldman FX Strategist

Investor sentiment is highly disconnected over tariffs as equities and forex markets are showing significant divergence in response to the announcements. This comes amid President Donald Trump‘s take on yen and yuan’s devaluation.

What Happened: According to the senior fellow at the Brookings Institution, Robin Brooks, the divergence in equity and foreign exchange paints two different pictures about the market sentiment on tariffs.

Brooks, formerly the chief FX strategist at Goldman Sachs, highlights that the weakening dollar defies the imposition of “meaningful” tariffs. Whereas, the decline in S&P 500 implies that equities are taking a hit from the tariff news.

“Both can’t be right,” reiterates Brooks in an X post.

Meanwhile, as the U.S. dollar weakens, Trump has said that Japan’s and China’s plan to devalue their currency in response to tariff threats is “unfair” to the U.S., reported Reuters. According to Trump, the way to solve this problem “very easily is with tariffs.”

However, Brooks believes that forex markets have turned agnostic to tariff threats, highlighting that the Mexican peso and Canadian dollar haven’t been reacting as well.

However, over 120 years, the U.S. dollar remains the most overvalued relative to other fiat currencies, said Otavio Costa, the macro strategist at Crescat Capital in an X post.

See Also: Mark Cuban Supports Trump’s New ‘Gold Card’ Scheme If Sold To Corporations For Employee Citizenship: Here’re The Listed-Companies With Most Number Of Immigrants

Why It Matters: The implementation of tariffs leads to a stronger domestic currency as imports reduce with higher duties, leading to fewer payments being made to foreign suppliers. However, the dollar index has fallen by 3.27% from its 52-week high of 110.180 to 106.579, as of Monday.

On the other hand, tariffs negatively impact the stock market because the expectation of higher inflation from tariff imposition leads to monetary tightening from the central banks.

While the market sentiment has turned 60.6% bearish according to American Association of Individual Investors survey, the S&P 500 index has slipped 4.84% from its 52-week high of 6,147.43 to 5,849.72, as of Monday. Thus, the stock market is factoring the tariff impact, whereas the dollar remains averse.

Price Action: The SPDR S&P 500 ETF Trust SPY and Invesco QQQ Trust ETF QQQ, which track the S&P 500 index and Nasdaq 100 index, respectively, fell on Monday. The SPY declined 1.75% to $583.77, and the QQQ dropped 2.19% to $497.05, according to Benzinga Pro data.

Read Next:

Photo courtesy: Shutterstock