Emerging from Trump's shadow, dollar volatility has fallen to its lowest level before the election.

The foreign exchange market has emerged from the violent turbulence of the early-year "Trump shock," with dollar volatility indicators returning to levels seen before the U.S. presidential election. This marks a significant cooling of investor concerns over uncertainties in Trump’s policies, and the market is returning to traditional drivers.

According to data from CME Group, the index measuring volatility expectations for the dollar against the euro and yen fell this month to its lowest level in over a year, after having surged dramatically following Trump’s election win last November. Meanwhile, the dollar index has recovered most of the ground lost earlier this year, approaching the level where its post-election climb began.

(Dollar Index Daily Chart)

Analysts believe a series of tariff agreements between the U.S. and major trading partners such as the EU and China have drawn volatility out of the market, while the U.S. economy has proven more resilient to tariff shocks than expected. Market participants say investors have learned to view policy headlines rationally instead of overreacting. Chris Turner, Head of Market Research at ING, noted: "The world is learning to coexist with Trump, and investors have learned to approach headlines calmly."

The end of rate-cut cycles by major global central banks has also removed another source of market instability. Analysts say this shift means the dollar is once again acting as a traditional safe-haven asset and portfolio stabilizer. After plunging alongside risk assets following Trump's April tariff statements, the dollar is now reacting once again to traditional factors such as interest rate differentials.

Tariff Agreements Calm Market Panic

Before the election, the dollar strengthened on "Trump trades" as investors bet that Republican trade and tax policies would boost the U.S. economy and currency. This completely reversed after April, with daily forex market trading volume hitting a record high near $10 trillion that month.

Concerns about trade conflict impacts on the U.S. economy and doubts about Federal Reserve independence led the dollar index to its worst start to a year since the 1970s. But since summer, the dollar has begun steadily rebounding, with a Wall Street rally to historic highs providing additional support.

George Saravelos of Deutsche Bank pointed out in the latest report that the collapse in volatility expectations shows that the "Trump shock" is over, trade tensions have eased, and fiscal policy is on "autopilot."

Fed’s Stance Supports the Dollar

Last month’s Federal Reserve meeting provided extra support for the dollar. The Fed cut rates, but Powell warned at the press conference that another rate cut is not a "foregone conclusion."

Investors say this shows the dollar is now responding to traditional factors determining currency strength, mainly interest rate differentials between countries. ING’s Turner commented: "We have returned to more traditional FX drivers."

CME Group data shows that demand for call options on the dollar overputs is at its highest since February, reflecting increased bets on further dollar strength.

Additionally, the longest government shutdown in U.S. history led to a lack of macroeconomic data, which also suppressed volatility in both the dollar and the U.S. Treasury markets.

Analysts note that in the absence of comprehensive data on inflation, the labor market, and consumer spending, investors have avoided taking large positions.

Since the government shutdown began, the ICE Move Index measuring Treasury market volatility has dropped to a four-year low. This data vacuum objectively dampens the market’s reaction intensity to breaking news and keeps volatility at low levels.

Regaining Safe-Haven Status

Some fund managers say the dollar is once again resuming its traditional role as a portfolio stabilizer.

Because the dollar tends to strengthen during periods of global stress, this feature was questioned after the dollar plunged alongside risk assets following Trump’s April tariff statements.

Robert Tipp, Global Bond Director at PGIM, believes that despite widespread discussion about the "end of American exceptionalism," broadly speaking, the dollar has been a strong currency for years. He believes this year’s dollar decline represents a "correction within a bull market," rather than "the beginning of an end."

Rushabh Amin, Portfolio Manager at Allspring Global Investments, says:

"The start of the year looked more like an anomaly than a trend. We believe the dollar will continue to serve as a tool for portfolio diversification, especially for foreign investors."

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