The U.S. dollar has long been regarded as a safe-haven currency, a financial refuge that investors turn to during times of global economic uncertainty. This reputation stems from the stability of the U.S. economy, the depth and liquidity of its financial markets, and the dollar’s role as the world’s primary reserve currency. At the same time, U.S. Treasury yields, which reflect the return on government bonds, often move in tandem with the dollar’s strength. When confidence in the U.S. economy is high, investors buy both dollars and Treasuries, pushing the dollar’s value up and yields higher as bond prices drop. However, recent market trends reveal a striking divergence: the dollar is losing ground, its value slipping against other currencies, while Treasury yields remain elevated. This disconnect is sparking rumours and debates on whether the dollar is relinquishing its safe-haven status.
The dollar is depreciating rapidly, falling against major currencies like the euro, yen, and francs while Treasury yields are climbing, with the 10-year Treasury note recently posting its largest weekly yield increase since 2001. This suggests that investors are selling off both dollars and Treasuries simultaneously, a sign of waning confidence in U.S. financial assets, with much suspect volume coming from China, which has been hit hard by tariffs. Instead, they’re turning to alternatives: the Swiss franc, which has soared to a decade high against the dollar, while the Japanese yen has strengthened to levels not seen since September 2023, and the ultimate safe-haven instrument, gold, saw prices hitting record highs at $3,200 and climbing as a trusted store of value and worsening outlook.
The root of this issue lies in the erratic trade policies championed by President Trump since his return to office. His administration has pursued an aggressive tariff agenda, imposing steep levies on imports from key trading partners like China while intermittently offering reprieves to others, only to reverse course later. For instance, Trump’s “Liberation Day” tariff threats targeted a wide swath of countries, promising punitive measures to protect American industries. Yet, within weeks, he granted a 90-day exemption to most nations while doubling down on China with even harsher tariffs. This volatile and unpredictable approach has left businesses struggling to adapt to shifting trade rules and supply chain disruptions. It has shaken investor confidence in the U.S. economy, forcing a flight from the dollar. The euro, powered by relative stability in the European Union, has climbed to its highest level against the dollar since early 2022. Meanwhile, the sell-off in Treasuries has kept yields high, as investors demand greater returns to compensate for the perceived risk of holding U.S. debt.
The consequences of the dollar losing its status quo are far-reaching, with increases in the cost of imported goods, which could trigger hyperinflation in the U.S. at a time when the Federal Reserve is already grappling with sticky price pressures. Simultaneously, elevated Treasury yields raise borrowing costs for the government, businesses, and consumers, with chances of collapse if defaulting becomes common. Beyond domestic concerns, the dollar’s decline challenges its dominance in global trade and finance—a position it has maintained since the Bretton Woods agreement post-World War II. If investors and central banks continue to diversify away from U.S. assets, the dollar’s role as the backbone of international transactions could weaken, paving the way for rival currencies or even gold to gain prominence. For now, the financial world watches anxiously as the dollar’s value erodes, Treasury yields defy expectations, and alternative safe havens rise, signalling a potential turning point in the global economic order.
Source: Reuters
Photos: Unsplash
