(Bloomberg) -- The dollar has emerged as the latest victim of this week’s market turmoil as a worsening global trade war risks derailing US economic growth.

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A Bloomberg gauge of the greenback tumbled to a fresh six-month low Friday after China raised tariffs on all US goods from 84% to 125% with effect from April 12. Options traders turned bearish for the first time in five years as part of a broader exodus from US assets as trade tensions between the world’s two largest economies continued to intensify. 

Havens such as the yen, Swiss franc and gold benefited from the outflows while the euro rose to its strongest in three years.

“Dollar confidence is under threat,” said Christopher Wong, a foreign-exchange strategist at Oversea-Chinese Banking Corp. Doubts are growing about the greenback’s status as a reserve currency due to factors including fading US exceptionalism and ballooning US debt, he added.

Traders are not only losing confidence in the dollar’s long-term prospects — they’re doing so at the fastest pace on record. One-year risk reversals, a key gauge of demand for upside versus downside exposure in the greenback against major peers, have flipped in favor of dollar downside for the first time in five years. 

A Z-score analysis — which measures how far current pricing deviates from historical norms — shows that the speed and magnitude of the shift toward bearish dollar positioning is not only significant, but the most extreme on record. It underscores the scale of the sentiment reversal, suggesting traders are rapidly recalibrating long-held assumptions about the greenback’s role as a haven and store of value.

Friday’s moves will round off yet another turbulent week for global markets as President Donald Trump’s fast-evolving trade policy leaves investors struggling to figure out their next move. The dollar recorded its biggest plunge in over two years on Thursday amid growing expectations that the Federal Reserve will have to lower borrowing costs to counter the contractionary impact of US tariffs.

Other US assets also suffered. The S&P 500 Index finished the day 3.5% lower on Thursday, while long-term Treasuries sank. Overnight indexed swaps have priced in 90 basis points of Fed rate cuts for the year.

Haven Bids

Havens witnessed a surge in demand amid the flight to quality. The yen rallied 1.4% to 142.43 per dollar on Friday, the strongest level since September.

The Swiss franc soared as high as 0.8113 to the greenback, a level last seen in early 2015, while gold rose to a fresh record. The euro also benefited from the broad weakness in the dollar and climbed to $1.1416, the highest since February 2022. The move reflects emerging haven-like dynamics, bolstered by Germany’s historic suspension of its debt brake last month.

Euro Is Becoming a Destination, Not Just a Trade: Trader Talk

The rapidly deteriorating outlook for the US economy is a sea change from earlier expectations that Trump’s return to the White House would usher in an era of lower taxes, quicker growth and a stronger dollar.

Traders are now watching for Beijing’s response after the White House clarified US tariffs on China rose to 145%. There’s also uncertainty about what will happen after the 90-day pause for higher tariffs on dozens of other nations is over.

“Unless you think some resolution is imminent, then the market is likely stay on the current path of least resistance — a dollar exit,” said Rodrigo Catril, strategist at National Australia Bank Ltd. in Sydney. “The narrative of exiting US assets and selling the dollar is likely to persist as long as trade tensions remain elevated.”

The exodus from U.S. assets is becoming a game-changer for currency volatility. The cost of hedging swings in major exchange rates is climbing, with euro volatility reaching its highest level since 2020 and the Swiss franc hitting highs not seen since 2016.

--With assistance from Ruth Carson.

(Updates with pricing, China tariffs)

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