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Key Takeaways
- The U.S. Dollar Index could have its worst stretch of two months since 2002.
- Former Treasury Secretary Janet Yellen said on Monday that the simultaneous selling of dollars and Treasury Bonds could signal a crumbling of faith in the stability U.S. assets, which have long been a backbone of global financial stability.
- MUFG analysts, in a Monday note, expressed skepticism regarding the Trump administration taking any steps to bolster confidence in the Dollar in the near future.
The U.S. Dollar is on track to experience its worst month for years, a development which has alarmed experts who are worried about the crumbling confidence in U.S. Financial Stability.
The U.S. Dollar Index is down more than 4.3% from the beginning of the month. If the index remained steady throughout April, the U.S. Dollar would have its worst month since November 20,22 and its ninth worst since 2000. The dollar’s decline of 3.2% in March is on track for its worst two-month stretch ever since 2002.
Are investors shunning dollar-based assets?
Market watchers have been puzzled by the dollar’s recent decline, including former Treasury secretary Janet Yellen who described the recent moves in world’s reserve currency as part of “a very abnormal pattern” in an interview with CNBC Monday.
Yellen explained how investors tend to gravitate towards safe havens such as U.S. Treasury Securities during times of market instability. She said that increased demand for Treasury bonds usually boosts the dollar, since Treasury bonds are only traded in dollars. Recently, Treasury yields have soared and the dollar has declined.
“This suggests that investors have begun to avoid dollar-based investments.” [are] Yellen said that she was “calling into question the safety” of the U.S. Treasurys, which are the bedrock of global financial systems.
Why are Treasurys and the Dollar falling?
Experts have a few theories as to why investors aren’t flocking into Treasurys despite the turmoil in the market. Some believe it’s due to the fact that tariffs are threatening to fuel U.S. inflation and force the Federal Reserve into maintaining high interest rates. Another possible explanation is the reduced demand from foreign investors and other countries who are scared by the Trump administration’s unpredictability.
Some have speculated China, as one of the largest foreign holders of Treasury debt, dumps its bonds in retaliation against Trump. According to a MUFG research note published on Monday, very little evidence supports that theory. Although they note China’s Treasury holdings have decreased by about 25% since 2021. “Possibly anticipating what lies in the future.” China has been a major proponent of global de-dollarization.
Yellen said on Monday that China dumping Treasurys or dollars would “create risks to the Treasury Market and to global Financial Stability” which would be harmful to them and would represent a significant escalation. It’s not what I would expect China do.”
Can Trump restore faith to the Dollar?
Analysts are concerned that Trump’s on and off approach to tariffs is eroding confidence in U.S. investments. MUFG analysts cited a disconnect with the U.S. currency’s rate spreads as their reason for claiming that Trump’s tariffs had created “a crise of confidence” in dollars. Yellen stated that “the loss of confidence in U.S. Economic Policy and the security of bedrock financial asset is really very alarming.”
Restoring confidence in the stability of Treasurys and the Dollar may be difficult. Trump’s announcement that many consumer electronics and semiconductors would not be subject to reciprocal tariffs, which he announced over the weekend, boosted equity markets on Monday. Analysts at MUFG say that “the reprieve” is just one more example of the high level of policy uncertainty which will continue to undermine the confidence in US assets.
Analysts at MUFG said that to rebuild trust, Trump and China would have to reverse their recent tariff increases and Congress would need to develop a plan for reducing the deficit. According to them, neither is likely.
Analysts write that “in the near-term, it is difficult for us to see any fundamental factors that will likely improve the investor sentiment.” “And the rhetoric from Trump (and Commerce Secretary) Lutnick does not point out any reason to be optimistic on a fundamental shift in policies that would prompt a recovery of the dollar.”
