Because of one person, the US dollar plummeted and US Treasury bonds surged, has the "Trump trade" reversed?

The overnight "Trump trade" has shown a reversal trend, with U.S. Treasury yields soaring, the dollar plummeting, and small-cap stocks giving back gains. Behind these fluctuations, Trump's nomination of Bentsen as U.S. Treasury Secretary has eased investors' concerns about Trump's trade tariff plans, but the market seems to be overly excited...

Specifically, the U.S. dollar index fell about 0.6%, marking its largest drop in over two weeks, while the dollar index has risen more than 7% since the beginning of last month until Friday. The dollar has been the main beneficiary of the "Trump trade," with the market expecting the Republican's tariff and tax cut policies to drive inflation and exert upward pressure on U.S. interest rates.

U.S. Treasury bonds also rebounded, with the yield on the 10-year Treasury note dropping 14 basis points to 4.27%, marking one of the best performances this year.

The U.S. stock market rose, with the blue-chip S&P 500 index up 0.3%. The small-cap-heavy Russell 2000 index briefly hit a new high before giving back some of its gains.

Investors generally expect that Bentsen will mitigate the impact of the Trump administration's aggressive trade and economic policy proposals. However, on the other hand, the market should remain cautious and not be overly excited.

Analysts believe that there should not be too much interpretation of the Treasury Secretary nomination, as the Treasury Secretary "is not the person who designs the details of the trade tariff implementation strategy." Under the Trump administration, the president is the one who ultimately drives policy.

Bentsen's Nomination Excites the Market

Bentsen described large-scale tariff policies as an "extremist" position last month. Earlier this month, in an interview with the media, Bentsen suggested "gradually phased" tariffs to mitigate market shock risks and seemed willing to negotiate the specific scale of tariffs advocated by the incoming president.

Paul Donovan, Chief Economist at UBS Global Wealth Management, stated, "It is a good thing for the market that at least one important member of the cabinet opposes the continued imposition of trade taxes." Vincent Chaigneau, Head of Research at Franklin Templeton Investments, believes that Bentsen's nomination indicates that Trump may not "fully" push the most inflationary policies, including tariffs.

Greg Peters, Co-Chief Investment Officer at PGIM Fixed Income, stated:

"The market is very concerned that someone might be more extreme; this nominee is capable, qualified, and is seen as the 'adult in the room,' which the market really likes."

UBS's trading department noted that Monday's market focus was particularly on digesting Bentsen's nomination as the next U.S. Treasury Secretary, summarizing:

He is a fiscal hawk (i.e., lowering interest rates), a slow mover on tariffs, and a candidate who supports tax cuts, all of which are beneficial for growth and favorable for cyclical/mid-cap stocks (especially those that are oversold and have high short interest).

Caution Should Not Be Relaxed

But on the other hand, the market should remain cautious and not be overly excitedMitsubishi UFJ Financial Group (MUFG) analysts stated:

Although Becerra has previously hinted at a potentially more balanced approach to trade tariffs, do not read too much into this nomination; the Treasury Secretary "is not the person designing the details of trade tariff implementation."

This aligns with the views of Harvard University professor Jason Furman, who stated that a fundamental point is that under the Trump administration, the Treasury Secretary will ultimately not drive policy; only the President will drive it.

Additionally, it is important to note that Becerra's nomination requires approval from the U.S. Senate to take office, which contradicts Trump's selection of a series of absolute loyalists for other key positions.

Skylar Montgomery Koning, a foreign exchange strategist at Barclays Bank in New York, also reminded:

Becerra's selection as Treasury Secretary triggered a decline in the dollar, but this is just a temporary pullback after rapid fluctuations, not a change in direction. Tariffs are coming, which is favorable for the dollar.

Earlier this morning, Trump announced the imposition of tariffs. According to CCTV News, on the 25th local time, President-elect Trump stated that a 25% tariff will be imposed on all products entering the U.S. from Mexico and Canada. Additionally, Trump announced an extra 10% tariff on Chinese goods.

Market trading also reversed compared to Monday, with the dollar rising sharply, the offshore yuan approaching the 7.26 mark against the dollar, and the Mexican peso falling over 1%