The Dollar: From debt crisis to currency crisis

The US Dollar is trying to find its footing as Treasury bond yields stabilise. Scott Bessent stated that concerns about the budget deficit are exaggerated. It is rising due to tariff revenue, but import duty revenue in 2026 is expected to be roughly the same as in 2025. The Treasury has a range of tools at its disposal to bring down yields in the debt market, which are currently fundamentally unsupported.

In the forex market, there is a growing view that the debt crisis risks escalating into a currency crisis. The Japanese government’s attempts to control bond yields ultimately resulted in a significant weakening of the yen. The sell-off of UK debt in 2022, caused by the mismatch between Prime Minister Liz Truss’s policies and the Bank of England’s monetary tightening, sent the pound plummeting to historic lows.

At present, the US Treasury’s policy runs counter to the Federal Reserve’s actions. The purchase of long-term bonds closely resembles quantitative easing, which expands the Fed’s balance sheet. Kevin Warsh, on the other hand, insists on reducing it. The Fed Chair believes that rising bond yields can curb inflation; however, Scott Bessent appears ready to do everything possible to lower Treasury yields.

Contradictions in government and central bank policies tend to have a detrimental effect on the national currency. The pound is not the only example. When Sanae Takaichi came to power in Japan, concerns over new fiscal stimulus measures against the backdrop of the BoJ’s tightening of monetary policy sent the yen plummeting to 40-year lows.

Thus, the collapse of the US dollar against what should be a favourable backdrop is beginning to look inevitable. As a rule, falling stock indices, stabilising Treasury bond yields, and rising oil prices due to the conflict in the Middle East act as tailwinds for a safe-haven asset such as the greenback. Not this time. The Treasury’s methods are undermining confidence not only in the Fed but also in the US currency.

In reality, nothing terrible has happened. There is a big difference between the Treasury’s intentions and its actions. As soon as the markets settle down, the US dollar may recoup some of its losses.

Summary: The Dollar’s weakness reflects policy tensions between the Treasury and Fed, raising fears that a US debt crisis could become a currency crisis.