Economy

Germany has long taken flak from Wall Street and financial capitals around Europe for the extreme fiscal conservatism that has kept the country’s debt levels low. But as global markets convulsed this week, investors rewarded Germany’s caution by snapping up its government bonds, which are known as bunds.Investors have reeled after President Trump imposed 10 percent tariffs on nearly every trading partner, temporarily rescinded even higher “reciprocal” tariffs hours after they came into effect and steadily ratcheted up tariffs on China to well above 100 percent.The resulting tumult hit U.S. assets hard, including Treasuries and the dollar, normally considered haven assets. That sent investors seeking other places for safety, such as gold, the Swiss franc and German bunds.The 10-year yield on German bunds, which moves inversely to prices, fell to 2.56 percent, near its lowest level in more than a month. That is notable relative to the 10-year U.S. Treasury yield, arguably the most important interest rate in the world, which has soared higher. On Friday, the 10-year U.S. yield was around 4.5 percent, climbing nearly half a percentage point in one week, a huge move in that market.Germany’s strict limits on government borrowing have given the country a stellar AAA credit rating. But last month, lawmakers decided that the next government could abandon the borrowing limit and take on trillions of euros in fresh debt to bolster the country’s military and crumbling public infrastructure. Germany’s export-driven economy is also heavily exposed to tariffs, given the large amount of trade its automakers and other industrial companies do with the United States.The prospect of extra borrowing and a slowing economy had begun to put pressure on German bunds. But the turmoil elsewhere in recent weeks prompted investors to turn back to the country’s debt as a source of safety.This week, Germany’s expected next chancellor, Friedrich Merz, also announced the blueprint for his government, which included an economic plan to jump-start the ailing German economy. And ahead of its planned borrowing binge, Germany benefits from low debt relative to the size of its economy, at about 60 percent of gross domestic product. By comparison, U.S. debt is about 120 percent of the size of its economy.It was “very striking” that in a moment of stress German bunds were acting as the “haven of choice” instead of U.S. Treasuries, said Sander Tordoir, chief economist at the Centre for European Reform, a research institute.“There does seem to be a real safety premium now being place on German government debt,” he said. More

The US dollar slid on Friday as Donald Trump’s erratic tariff regime heightened global economic uncertainty and triggered a flight into gold and other haven assets. The US dollar index slumped below 100, a key threshold, for the fist time since July 2023 during trading in Asia. The euro rose 0.8 per cent to $1.13 and sterling gained 0.3 per cent to $1.30. The yen strengthened to ¥143.9 per dollar, a six-month high. “You’ve gone from growth and inflation worries to worries about liquidity and market functioning”, said Mitul Kotecha, head of emerging markets macro strategy at Barclays, who also cited “policy uncertainty” from the US as a reason for the decline in the dollar. Gold prices hit a record high and the Swiss franc surged as investors moved into haven assets. Bullion prices jumped as much as 1.4 per cent to $3,218 a troy ounce while the Swiss franc climbed as much as 1.2 per cent against the dollar to SFr0.814. It subsequently pared gains to trade around SFr0.82. On Thursday the S&P 500 dropped 3.5 per cent and the Nasdaq fell 4.3 per cent while Treasuries sold off on concerns of a US recession and trade war with China. On Friday yields on 10-year Treasuries were flat at 4.42 per cent after rising 0.09 percentage the previous day. Bond yields move inversely to prices. Asian equities were mixed with Japan’s Topix falling 2.9 per cent while Taiwan and India rose 2.8 per cent and 2.3 per cent, respectively. Hong Kong’s Hang Seng index gained 1.1 per cent and China’s CSI 300 rose 0.3 per cent. More

The bedrock of the financial system trembled this week, with government bond yields rising sharply as the chaotic rollout of tariffs shook investors’ faith in the pivotal role played by the United States in the financial system.U.S. government bonds, known as Treasuries because they are issued by the U.S. Treasury, are backed by the full faith of the American government, and the market for Treasuries has long been deemed one of the safest and most stable in the world.But the Treasury market’s erratic behavior all week has raised fears that investors are turning against U.S. assets as President Trump’s trade war escalates.The yield on the 10-year Treasury, which underpins corporate and consumer borrowing and is arguably the most important interest rate in the world, rose roughly 0.1 percentage points on Friday. The rise added to sharp moves throughout the week that have taken the yield on the 10-year Treasury from less than 4 percent at the end of last week to around 4.5 percent.These increases may seem small, but they are large moves in the Treasury market, prompting investors to warn that Mr. Trump’s tariff policies are causing serious turmoil. It matters to consumers as well. If you have a mortgage or car loan, for example, then the interest rate you pay is related to the 10-year yield.Ten-year treasuries are also considered a safe haven for investors during time of volatility in the stock market, but this week’s sharp rise in yields have made this market unusually perilous.We are having trouble retrieving the article content.Please enable JavaScript in your browser settings.Thank you for your patience while we verify access. If you are in Reader mode please exit and log into your Times account, or subscribe for all of The Times.Thank you for your patience while we verify access.Already a subscriber? Log in.Want all of The Times? Subscribe. More

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Federal Reserve officials have had one clear message since President Trump sharply escalated the global trade war this month. Keeping inflation expectations in check as price pressures rise is their No. 1 priority.On Friday, they faced a big setback.A new survey released by the University of Michigan found that as consumer sentiment took another nosedive because of fears associated with Mr. Trump’s tariffs, expectations about inflation — in the year ahead and over a longer time horizon — jumped sharply.Over the next 12 months, respondents now expect inflation to surge to 6.7 percent, the highest reading since 1981 and a significant increase from the March level of 5 percent. In five years’ time, they are bracing for inflation to stay stuck above 4 percent. The Fed’s goal is 2 percent inflation.There are reasons to take this data with a grain of salt. For one, the survey tends to reflect political biases. Since Mr. Trump returned to the White House, Democrats, once optimistic about the outlook, have turned much more downbeat, about not only inflation but also growth and the labor market. Republicans, meanwhile, have flipped from being far more pessimistic during Biden’s presidency to much more positive.On the margins, that political divide may be beginning to narrow, with the decline in sentiment in April “pervasive and unanimous across age, income, education, geographic region and political affiliation,” according to Joanne W. Hsu, director of the consumer surveys. Independents are also starting to change their opinions in a distinct way, accounting for a large part of the rise in longer-run inflation expectations.What has helped to somewhat alleviate concerns about the survey findings is the fact that market measures of longer-run inflation expectations, which are based on U.S. government bonds, have stayed far more stable. The divergence has been so stark as to prompt Jerome H. Powell, the Fed chair, to refer to the University of Michigan survey as an “outlier,” as recently as last month.We are having trouble retrieving the article content.Please enable JavaScript in your browser settings.Thank you for your patience while we verify access. If you are in Reader mode please exit and log into your Times account, or subscribe for all of The Times.Thank you for your patience while we verify access.Already a subscriber? Log in.Want all of The Times? Subscribe. More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.The writer is an FT contributing editorIn August 2019, central bankers and academics gathered at Jackson Hole in Wyoming to talk, among other things, about the dollar. The guest of honour was Mark Carney, then the departing head of the Bank of England. He gave the kind of speech you can only give on your way out, starting a disagreement that doesn’t yet have a clear answer: is the global dollar system inherently problematic, or is it America’s to lose? Carney warned that the old models of how to be a central banker might not work any more. Everyone in his audience with an economics PhD had learnt that financial co-ordination among countries was inefficient, and that flexible exchange rates and sovereign discretion over their own currencies gave central bankers the tools to fix their own problems. But exchange rates weren’t actually flexible, Carney pointed out, when half of global trade was invoiced in dollars. And when two-thirds of global securities were issued in dollars, tightening at the Fed meant tightening everywhere. It was an illusion that each central bank had sovereign discretion to respond to shocks such as trade wars. The constraints of a global dollar were already familiar to everyone in the room. But what Carney suggested at Jackson Hole was a radical step. Over the long term, he said, the world couldn’t just stumble from one dominant currency to the next. Perhaps it was possible for central bankers to co-ordinate what he called a “synthetic hegemonic currency” — a basket of central bank digital currencies.Stanley Fischer, a former vice-chair at the Federal Reserve who had left his job a few months after Donald Trump’s first inauguration, was the first torespond. “The trouble one has is, the problem is not in the IMFS,” he said, referring to the international monetary and financial system. “It’s in the president of the United States.” The global dollar is an inelegant system. It happened in part because the US was unwilling to co-ordinate with other countries after the second world war when it could just as easily dictate to them. But a decades-long dominant currency regime doesn’t endure through obstinacy alone. The dollar is proof that central bankers already can and do co-ordinate.In the 1960s, as banks in London built out a massive system of offshore dollar loans and deposits that came to be known as eurodollars, countries found it was useful to have their savings sloshing around in the City, rather than coming home as inflation. Large American companies liked the flexibility to borrow through London, particularly when the Fed was tightening at home. The political economists Benjamin Braun, Arie Krampf and Steffen Murau argued that you don’t get a system like that unless central bankers want it to be there. Central bank swaps — short-term trades of Fed dollars for sterling from the Bank of England, for example — grew out of regular conversations among central bankers trying to figure out who would be the lender of last resort for a system no one really owned or wanted to admit existed. When oil producers began to accumulate more profits than they could ever spend on their own populations, the eurodollar system was already in place, rails to move dollars around without ever having to bring them home to wreak havoc. This was the environment that existed when, as the sociologist Greta Krippner has pointed out, the US figured out in the 1980s that it didn’t have to disappoint anyone at home by fixing its current account deficits — it could just sell as many Treasuries as it cared to into an existing offshore dollar system desperate for safe assets. Then, as banks holding offshore dollars began to teeter in 2008 and again in 2020, the Fed offered dollar swaps to a growing collection of central banks, whose policymakers return to Jackson Hole every year in part to reaffirm the social ties that make the dollar system possible. Until now, the dirty secret of the global dollar system has been that a lot of important people quietly loved it.Carney is now the prime minister of Canada, responding to threats from the US to his country’s economy and even sovereignty. Any country other than the US precipitously raising and lowering tariffs, gutting its Internal Revenue Service and nonchalantly considering territorial grabs would have seen smoking-hot capital flight months ago. Only now, though, almost three months into Trump’s second term, are asset managers beginning to reconsider the story of America as an inexhaustible well of safe bets. Only now is the yield on Treasuries climbing, possibly as a sign of risk. The offshore dollar system was already the co-operative, synthetic global currency Carney wanted. The dollar was not imposed by a hegemon. It is instead, as Fischer predicted, being torn apart by a madman.  More

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The number of European travellers visiting the US has fallen sharply as political and economic tension and fears of a hostile border under President Donald Trump threaten the world’s most lucrative air routes. Visitors from western Europe who stayed at least one night in the US fell by 17 per cent in March from a year ago, according to the International Trade Administration. Travel from some countries — including Ireland, Norway and Germany — fell by more than 20 per cent, an FT analysis of ITA data showed.The trend poses a threat to the US tourism industry, which accounts for 2.5 per cent of the country’s GDP. Some airlines and hotel groups have warned of waning demand for transatlantic travel and a “bad buzz” about visiting the US. The total number of overseas visitors travelling to the US dropped by 12 per cent year-on-year in March, the steepest decline since March 2021 when the travel sector was reeling from pandemic restrictions, according to the ITA data.“In just two months [Trump] has destroyed the reputation of the US, shown one way by diminished travel from the EU to the US,” said Paul English, co-founder of travel website Kayak. “This is not only one more terrible blow to the US economy, it also represents reputation damage that could take generations to repair.” Some content could not load. Check your internet connection or browser settings.The decline may have partly reflected the rise in travel during Easter, which fell in March last year, said Adam Sacks, president at Tourism Economics. But he said other data, including from US airports and land crossings from Canada, all showed “it’s very clear something is happening . . . and it is a reaction to Trump”.Transatlantic routes are the most profitable in the world, and airlines have enjoyed booming demand on these flights since the pandemic, especially in premium seats. Virgin Atlantic last week warned of a “modest” slowdown in demand for transatlantic flying from US consumers, and Air France-KLM’s CEO Ben Smith on Wednesday said the carrier had been forced to cut economy class transatlantic fares amid “slight softness” in the market.But British Airways owner IAG and US carrier Delta Air Lines both said they had not seen any impact.Airline fortunes are closely tied to the wider economy, as consumers tend to hold off on flying when they are worried about a recession. Barclays analysts said this week they remained concerned about transatlantic routes, where they expected profitability to be “abruptly diminished”.Naren Shaam, CEO of travel booking site Omio, said cancellation rates for bookings to the US were 16 per cent higher in the first quarter than a year earlier — with travellers from the UK, Germany and France showing an even higher cancellation rate of 40 per cent.Sébastien Bazin, chief executive of French hotel giant Accor, told Bloomberg that reports of detentions at the US border had created a “bad buzz” around visiting the US. Accor last week said bookings for Europeans visitors to the US this summer were down 25 per cent. Some content could not load. Check your internet connection or browser settings.The drop in international visitors to the US underscores the potential economic impact of a more aggressive border policy under Trump.Last year, international visitors spent more than $253bn on US travel and tourism-related goods and services, according to the ITA, or more than 19 per cent of $1.3tn in US travel spending in 2024.The US Travel Association, an industry group, warned of “concerning trends”, which it put down to factors including “a question of America’s welcomeness”. Delta president Glen Hauenstein said that the carrier had seen a “significant” drop in bookings from Canada. The airline pulled its guidance this week amid the wider uncertainty. Gloria Sync, an artist and author in Nottingham, England, said she cancelled a May trip to San Francisco after seeing reports of detained tourists. “The borders seem unsafe,” said Sync, who is transgender and said she was also worried about the “unwanted attention” her identity could bring at the border. “I don’t know if I’ll ever go back, to be honest.”Some content could not load. Check your internet connection or browser settings.Travel from Canadians, a key source of tourism for “winter-sun” destinations, has also declined. Places in the US such as Las Vegas, for example, welcomed 1.4mn Canadians in 2023 — or a quarter of all international visitors.Research firm Tourism Economics, which had previously estimated a 9 per cent increase in international arrivals compared to 2024, last week revised its forecast to a 9.4 per cent decline instead after Trump’s tariff announcement last week.Sacks also pointed to Trump’s aggressive rhetoric towards the EU, Greenland and Canada. “These are all unforced errors, and they have a significant effect on sentiment towards the US, and therefore travel.”Trump’s tariffs and his administration’s dismantling of foreign aid agency USAID led retiree Paul Harrington, a Briton living in Paris, to cancel a trip to Washington DC next year.Both of his daughters in the UK work in education and a recession could put public sector jobs at risk. “I am now contacting my US friends to visit me in Paris,” said Harrington. “I will not visit the States until Trump is gone.” More