Stocks rose Tuesday morning in a much-needed reprieve from the recent volatility. US markets had resumed their downward momentum on Monday following the long holiday weekend, stoking fears that the latest correction had not yet run its course.

President Trump has been outspoken in his distaste for Fed Chair Jerome Powell, and that rhetoric continued over the weekend as Trump called for the Fed to act by lowering interest rates.

Stocks hate uncertainty, and while market participants are pricing in four rate cuts this year, the exact timing and amounts will depend on a host of incoming data over the next several months. Despite Trump’s best efforts, the Fed will (and should) remain completely independent and out of politics.

That being said, we have seen the Fed act in the past during times of great market stress. If markets fall further and volatility rises even more, it won’t be too shocking to see the Fed come to the rescue, particularly considering inflation data has been tame as of late. A sudden rise in unemployment could also trigger a move from the central bank.

Dollar Sees Worst Start to Year in History

Yet Powell himself has stated that financial markets are “orderly and functioning as you would expect them to in a period of high uncertainty.” The ambiguity surrounding the tariff situation is certainly playing a large role in this year’s negative start. It’s also important to remember that coming into this year, stocks were overvalued by many traditional metrics. Regardless of the trade war that spooked markets in 2025, a pullback in stocks was warranted.

Still, an uncomfortable development appears to be unfolding here outside of stocks. Normally in times of market stress, we see a ‘flight to safety’ into treasuries. This usually aligns with falling borrowing rates and a stronger US dollar, which gives domestic consumers more purchasing power as imported goods become cheaper.

But since the beginning of the year, the US dollar has moved sharply to the downside relative to a basket of other currencies. And since early April, bonds have lost value and yields have moved up. So, the dollar is cheaper, which means the cost of imported goods is higher. The US Dollar is now down more than 9% this year, its worst start to a year in history:

Image Source: StockCharts

Concerns are rampant that global investors are losing faith in the United States. The unpredictability of Trump’s tariff policies has led to a reduction in confidence and hesitant foreign investment.

The collapse in the dollar is playing a big role in the outperformance of international stocks this year. We can also see in the above image that it has broken multi-year support, signaling that there is more risk to the downside in the short-term.

With a rough start for domestic markets, most developed (and emerging) country ETFs are outperforming this year. The iShares MSCI Germany ETF (EWG Quick QuoteEWG - Free Report) , for example, is one of the leading developed ETFs in 2025 with a greater than 18% return year-to-date:

Image Source: StockCharts

Final Thoughts

Despite Tuesday’s gains, the major US indexes are clearly in a short-term downtrend and selling pressure continues to dominate the tape.

A defensive theme has reflected the tone of the market throughout this year. Gold and related stocks have done well, as have staples like grocers.

Risk management is always paramount, but particularly in times of market stress. But just remember, these downturns eventually pave the way for new leaders to emerge.

For now, keep an eye on the dollar. Bulls would like to see the greenback stabilize and allow bond markets to return to signs of normalcy.