Bitcoin’s Response To Tariffs Says A Lot About The Dollar

Much has been made about how stocks and cryptocurrency assets have become correlated ever since President Donald Trump announced his “Liberation Day” tariffs on April 2. This is taken as evidence that the initial proposal was bad — and the subsequent postponement good — for risk assets in general, as might be expected if the main fear is that the tariffs will trigger a recession. Unfortunately, much of the commentary has contained more partisan bluster than cool economic analysis.

A closer look at the timing of the movements in the two asset types suggests a different conclusion — one with troubling uncertainties for the US dollar rather than for international trade and goodwill, or economic recession.

Financial markets seem to have gone through three reaction stages. The after-market trading on April 2 and moves the next two days were driven by a fear of disruptions in financial markets, trade flows and international relations — bad for stocks, good for crypto. Over the weekend and until Trump made a partial reversal on April 9, investors switched to fearing a global recession. Since the pivot, concern seems to be centered on the value of the US dollar.

All this should be qualified by noting that it’s dangerous to interpret market moves immediately after they happen. It can take months or years to understand what markets are saying, and often we never figure it out. Markets are trying to value cash flows for many decades in the future at a time when a lot is going on. Things that move stocks today tend to appear in the headlines well into the future.

One exception is clear-cut news such as Federal Reserve interest rate changes, the release of major economic statistics and natural disasters. We know when the market learns the news, and can measure the reaction over seconds or minutes, without the noise that accumulates over a day or more of trading. But the Trump tariff news does not qualify for many reasons including the complicated nature of the levies, which required time to digest and evaluate reactions.

Also Read: US Bitcoin ETFs Shed $5.5 Billion In Longest Run Of Outflows

The initial stock reaction to the “Liberation Day” announcement was less than a 1% decline in the first 10 minutes of after-market trading, but the S&P 500 Index tumbled 10.5% over the next two days. Bitcoin was going up at the time. These moves came as the market absorbed the reactions of foreign countries and more thorough analysis of the fallout. Moreover, there were important indirect implications. The aggressive tariffs suggested Trump would move more rapidly and strongly — even recklessly — in his overall plans, including cost cutting through the Department of Government Efficiency, deregulation and immigration enforcement. The dramatic unilateral action seemed likely to undercut international cooperation and goodwill.

Something changed over the weekend — stage 2. Stocks didn’t move a lot on Monday and Tuesday, but Bitcoin prices fell dramatically. Trade wars, international tension, protectionism, capital controls and financial repression all favor Bitcoin, but a global recession would likely hurt Bitcoin as much or more than stocks.

An important background to this is the fragility of the global economy ever since it began to recover from the Covid pandemic. We flirted with stagflation in the Biden years, and most economists predicted a recession when the Fed began aggressively raising rates to quell inflation. At the time of Trump’s election, the probability of recession was around 25% and has been rising since.

The tariff announcement crystallized these fears. It’s not so much that investors thought the tariffs by themselves would cause recession, but in a fragile situation, they might be enough to trigger one, and to make it longer and deeper than it otherwise would have been.

Since Trump’s partial reversal on higher tariffs for dozen of trading partners, stocks and crypto have moved together far more than can plausibly be explained by news — stage 3. When we’ve seen this in the past, it’s generally been the US dollar causing the movements. Both stocks and crypto are valued in dollars, if the value of the dollar falls, they both go up, if the value of the dollar rises, they both go down. This is not the value of dollars as measured by the Consumer Price Index or foreign exchange rates, it’s how investors feel about holding dollars and nominal assets as opposed to securities such as stocks and crypto.

Tariffs would generally reduce the attractiveness of holding money relative to non-monetary assets. Americans can’t buy as much with their dollars, and reciprocal tariffs mean foreigners can’t buy as much with their currencies either. More generally, things that interfere with free markets make money less valuable. Conversely, a flight to quality can mean international tensions and trade disruptions make dollars more valuable, despite their reduced purchasing power. A more financially assertive US can have the same effect on the buck.

In any event, when Trump retreated, both stock and crypto investors seemed to decide that dollars were less valuable, so both asset types went up in lockstep and have continued the pattern. Given the swirling uncertainties, it would take a crystal ball to predict when the market will move on to the next stage of grief and the stock-Bitcoin correlation will change.

What does this mean for the future? The tariff kerfuffle will likely continue for months, if not for the entire Trump administration. The temporary pause has defused the situation and lowered the odds of a recession or major international conflict. If the administration can stabilize policy, the issue may become like the debt-ceiling/government-shutdown events that roil markets and politics for a time and then seem to fade into insignificance — even if the basic conflicts are never resolved.

The deeper issue of Trump’s aggressiveness and willingness to listen to mainstream advisers is more important. The next time something like this happens — and I’m confident there will be a next time — I’d expect stocks to react faster and more negatively, and crypto to gain. This drama was dominated by the economics of tariffs and diplomacy. The next one will be viewed by investors as another act in a long-running play. Why worry about the long-term economic implications of policies that change or even reverse daily? Politics, not economics, may be the main driver of financial market volatility until Trump settles down or leaves office.

Also Read: Rupee Opens Stronger On Plunging Dollar Index, Exports Likely To Pick Up In 90-Day Tariff Pause