The continuous decline of the US dollar implies an escalation of tariff risks. High US tax rates may backfire on stocks and bonds.

On July 9th, the currency market issued a warning as the deadline for the Trump administration's "90-day tariff deferral to 10%" approach, suggesting that the stock and bond markets, especially the record-breaking US stocks, may significantly underestimate the risk of an increase in US tariffs after July 9. Pricing signals in the currency policy indicate that the tariff rate may exceed the expected 10% rate by investors. The dynamics of recent trade negotiations between Vietnam and India, as well as Japan and the United States, highlight the risk of high tariffs above 10% even for the closest trading partners of the United States, increasing the risk of global trade and economic growth. If one insists on being bullish on the stock market, it is best to also bet on the outcome of the final deadline for the tariff deferral on July 9, otherwise there may be a high cost. The currency market, especially for countries that may be impacted by high tariffs, is taking a more cautious stance in their currency trading compared to the stock and bond markets, which are presenting an entirely different tone of optimism. The Trump administration has been vague on the tariff rates after the July 9 deadline, but investors are beginning to get some clues through the pricing trends in the currency market: the currencies of countries facing tariffs against the US have significantly strengthened against the US dollar, indicating that the foreign exchange market is betting on a collapse in US asset valuations under high tariffs or a gradual collapse of the "American exceptionalism" theory. In the foreign exchange market's view, the tariff rates set by the US government after July 9 may be much higher than the 10% tariff rate average that the US stocks have digested. At that time, Trump may once again make concessions, or he may not; with the stock market at record highs and bond yields (especially the 10-year US Treasury yield) remaining stable, he may not necessarily need to make concessions. We cannot predict the outcome, but what is known is that Vietnamthe second country to reach a trade agreement with the US after the UKreached a trade agreement with the US with a basic tariff of 20%, indicating a possibility of imposing 20% to 40% tariffs on goods from other countries. We also see India, which has close trade relations with the US and is close to reaching a trade agreement, proposing retaliatory tariffs of 25% on US cars to the World Trade Organization. It is hard to imagine that if Vietnam, considered a "sincere partner," still faces a 20% tariff, then the countries negotiating with the US will find it difficult to get better trade conditions. The global stock markets have rebounded since Maysuch as the MSCI Global Stock Index and the US S&P 500 Index reaching new highs, essentially giving the green light to the US to "impose appropriate tariffs" on trade issues; if there is any information, this rally has probably already sent the message to Washington that "the market can accept these approximately 10% tariffs, and even welcome them." The risk lies in the market possibly misjudging again, repeating the situation in March where a misjudgment led to a market crashwhen the stock and bond markets believed that Trump's tariff policy would be gradual and not too harsh, and would not have a major impact on the global economy. However, the radical retaliatory tariffs announced by the Trump administration on "liberation day" in early April showed that the market's judgment in March was completely wrong. Some Wall Street analysts who are cautious about the stock market are more concerned about the larger market question: why are the currencies of countries facing the biggest tariff threats appreciating against the US dollar since early April, while the currencies of countries facing weaker tariff threats are not? Foreign exchange market risk Take Taiwan as an example, after facing a threat of up to 32% in tariffs in April, the New Taiwan Dollar appreciated substantially from 33.25 in mid-March to 28.94, an increase of nearly 13%. The most direct explanation is that Taiwanese companies operating in the US either hedge against the US dollar exchange rate or directly sell off US dollar assets and repatriate them, but such a substantial appreciation could also mean that foreign exchange traders believe that the final tariff rate may be higher than the current 10%. The situation in South Korea is similar, with the Korean Won appreciating nearly 8.5% against the US dollar since the proposal to impose 25% retaliatory tariffs at the beginning of April; for a sovereign currency, this is not a small fluctuation and has already been categorized as significant volatility in foreign markets. The logic behind this is largely due to the foreign exchange market believing that South Korea, as an export-oriented economy, may face higher tariffs. Switzerland had faced a 31% retaliatory tariff in early April, leading to a 10% appreciation of the Swiss Franc. The question arises: are the investors and businesses really facing tariff risks aware of the information or risks they predict being overlooked by investors in the stock and bond markets? If tariffs exceeding 10% are not a concern, why are these countries quickly hedging or withdrawing their US dollar assets? Why are foreign exchange traders still betting on the collapse of "American exceptionalism" while the US stock market continues to surge? Risk of USD weakening Indeed, the US dollar index, which measures the strength of the US dollar against a basket of currencies, has been noticeably weakening since 2025 and seems lackluster, primarily because the foreign exchange market is betting that "American exceptionalism" will eventually collapse. The US dollar index has already fallen by 11.5% year-to-date, with about half of the decline occurring before Trump's "liberation day" in early April. However, for currencies like the New Taiwan Dollar and the Korean Won, most of the weakening of the US dollar occurred after the trade policy-related news in April. If these phenomena can be seen as pricing trends by "smart money" or "informed money," it clearly indicates that those with US dollar exposures have genuine exchange rate concerns and need to hedge or completely cover their US dollar positions. Currently, the biggest uncertainty is clearly focused on the trade policy risk of the Trump administration. Michael Kramer, founder of Mott Capital Management, lamented that the outcome is imminent and the stock and bond markets clearly underestimate the tariff risk. "If investors have not yet begun risk management or hedging positions, they should at least pay attention to this issue now," Kramer said.