Markets Recalibrate as Recession Fears Simmer and Dollar Finds Its Footing

After a stormy stretch of tariff-driven volatility and macroeconomic hand-wringing, global markets are beginning to show signs of tactical recalibration. While uncertainty still lingers around U.S. trade policy and its broader impact, the narrative of systemic unraveling is giving way to a more balanced read on growth, inflation, and monetary policy expectations.

Dollar Dips, But It’s Not Down for the Count

The U.S. Dollar Index posted a rare two-week slide, as markets reacted to concerns that the latest round of reciprocal tariffs including probes into semiconductor and pharmaceutical imports could derail U.S. growth momentum. Yet despite the chatter around de-dollarization, the greenback has begun to quietly firm, a reflection of reflexivity returning to rates markets and a more measured digestion of policy risk.

This is not a full-fledged rally, but it is a clear reminder: when the macro fog thickens, capital still gravitates toward USD liquidity. The soft bid under the dollar hints at short-covering, and possibly a renewed appreciation for the Fed’s relative positioning as traders reassess the central bank divergence narrative.

Treasuries Speak Louder Than Fear

Last week saw 10-year Treasury yields surge by 50 basis points the sharpest move in over 20 years but it wasn’t a vote of no confidence. Rather, it reflects the market’s effort to reprice risk in an environment where growth expectations are fading but inflation remains stubborn.

Even as Federal Reserve officials revised down their growth forecasts and nudged up inflation projections, there’s no sign that the bond market is dysfunctional. In fact, as SARACEN MARKETS observes, we’re finally seeing a healthy separation of panic from price discovery.

This is recalibration, not collapse. The Fed is still in the game. The Treasury is watching capital flow data closely. And unless someone dumps a trillion dollars’ worth of U.S. government bonds in a single session, it’s premature to call time on the dollar or U.S. financial stability.

Equities Ease, But Not Capitulate

While exposure to U.S. equities has been trimmed in anticipation of tariff fallout, institutional flows haven’t capitulated. Market participants are showing a willingness to buy dips if valuations re-approach recession-level pricing. The view is simple: the U.S. may be slowing, but it’s not broken.

Uncertainty surrounding trade policy remains a drag, especially as President Trump’s tariff strategy continues to shift  with moments of conciliation sparking short-term relief rallies. Markets have taken note of recent exemptions as a possible signal of flexibility, offering a path toward negotiation and averting deeper trade fragmentation.

Key Takeaways for SARACEN Clients

• Dollar positioning remains fluid: Despite two weeks of weakness, demand is returning as macro noise fades and the Fed/ECB divergence narrative sharpens.
• Treasuries still functioning as a price signal: Yield curve behavior reflects recalibration, not dysfunction. The 2s10s spread deserves close monitoring.
• Volatility remains tactical, not systemic: Price action is reverting to fundamentals rather than fear-based algorithms.
• Tariff noise is not going away: Expect continued sector-specific headline risk, particularly in tech and pharma.

SARACEN STRATEGY CALL:

We recommend maintaining flexibility across macro portfolios, favoring asymmetric opportunities in FX and duration. The dollar’s consolidation phase offers selective re-entry points, while the rates market presents tactical duration plays as the Fed’s balancing act between inflation and growth continues. Monitor U.S. CPI, trade negotiations, and Fed speak for directional cues.

In markets like this, reflexivity is your edge not fear. Stay liquid. Stay informed.