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Investor concerns regarding the US public finances have led to the dollar experiencing its largest weekly decline since President Donald Trump’s announcement of tariffs on “liberation day” in early April. The US currency dropped by 0.9% on Friday against a basket of currencies, resulting in a 2% decline for the week, the biggest drop in six weeks. This decline was attributed to worries about rising US debt levels following Trump’s tax bill, prompting some investors to consider reducing their significant holdings in dollar assets due to concerns about unpredictable policymaking and the ongoing trade war.
Chris Turner, global head of markets research at ING, stated that lingering fears about the quality of US asset markets and the potential de-dollarisation are impacting the dollar. Recent data showing outflows from US assets and a statement from G7 finance ministers mentioning “unsustainable global macro imbalances” have added to the negative sentiment.
US Treasury secretary Scott Bessent attempted to downplay concerns about the weakening dollar, attributing it to other countries’ currencies strengthening rather than the dollar weakening. Bessent cited a “fiscal expansion” in Europe boosting the euro and the Bank of Japan’s interest rate increases supporting the yen.
Speculation that Asian countries may negotiate trade agreements with the US to strengthen their foreign exchange rates against the dollar has boosted several currencies, including the Korean won and Taiwanese dollar in recent weeks. Lee Hardman, senior currency analyst at MUFG, mentioned that renewed investor concerns about the US fiscal outlook and rumors of the Trump administration aiming to devalue the dollar in discussions with other nations have contributed to the recent sell-off.
Concerns about the impact of Trump’s tax-cutting bill on the US deficit have triggered a sell-off in long-term US debt, resulting in a rise in the 30-year Treasury yield by 0.13 percentage points this week to above 5%.
BBH analysts indicated that investors’ worries about the increasing US fiscal burden are gradually mounting. The weakening dollar this year has been linked to apprehensions about the effects of Trump’s tariffs on the US economy, with periods of dollar decline coinciding with drops in US government bonds and stocks, indicating a shift in investor sentiment away from dollar assets.
Michael Metcalfe, head of macro strategy at State Street Global Advisors, expressed concern about the dollar’s reaction to high US rates, suggesting that the correlation between currencies and bond prices moving in the same direction reflects a potential policy sustainability issue. RBC BlueBay Asset Management analysts predicted a continued weakening of the dollar as investors seek to hedge against the greenback in the short term and reassess their overexposure to the US in the long term.
Additional reporting by Steff Chávez