Traders are calling bluff on Trump’s 'big, beautiful bill'

Washington is becoming a fiscal disaster zone

Traders woke up to another bruising reminder that bond markets don’t lie—they scream. Wednesday’s botched 20-year Treasury auction didn’t just miss—it detonated, reigniting the sell-off in long-end U.S. rates and ripping a fresh hole in US equity markets. With the “Big, Beautiful” tax bill lumbering through Congress and deficit math spiralling, the market’s message was simple: no more free rides— pay the premium or bust.

The dollar couldn’t find a bid despite the yield surge, which tells you everything: this isn’t a growth story—it’s a credit story. USTs are starting to trade like EM paper. Regardless of the letters any credit rating agency assigns to U.S. paper, Washington is becoming a fiscal disaster zone, and markets don’t buy the “cost-neutral” spin from the White House. The bill’s arithmetic is fantasy, and everyone knows it.

Traders are calling bluff on Trump’s “Big, Beautiful Bill”—and the dollar is caught in the crossfire. With House Republicans rushing to push the tax package through before the Memorial Day recess, risk desks are no longer debating if the U.S. deficit is ballooning—they’re trying to price just how ugly it could get.

Let’s get real: this isn’t fiscal expansion, it’s fiscal fantasy. A cobbled-together mix of higher SALT caps to pacify moderates and Medicaid rollbacks for the far right may deliver a vote win, but it’s torching Treasury demand. The 20-year auction flop yesterday was the latest red flag—5.047% clearing and a limp 2.46 bid-to-cover. That wasn’t just weak—it was a warning.

The fallout was textbook: yields spiked, stocks cracked, and the dollar took another leg lower. A widening SOFR-UST 10Y spread—now pushing -58bps—shows funding stress isn’t just creeping in, it’s setting up camp. Bond desks have gone from “concerned” to “positioned.” And with risk assets rotating out of U.S. duration and into European and Asian markets, the greenback’s status as a safety valve is eroding by the day..

The US-Japan bilateral wrapped with the usual diplomatic platitudes—no direct FX talk, but a mutual nod that exchange rates should reflect “market forces” and “economic fundamentals.” That gave USD/JPY a quick relief pop, but didn’t stick.. With confidence in US fiscal management hanging by a thread and long-end yields pricing in dysfunction, the path of least resistance for the yen remains higher. Until Washington gets serious about its deficit trajectory, rallies in USD/JPY are just selling opportunities dressed up as optimism.

European FX is riding the wave of U.S. repositioning. The ECB’s reported push to stress test USD funding only adds fuel to the rotation thesis—why park cash in a dollar when even eurozone policymakers are preparing for potential Fed emergency swap cutoffs?

Today’s PMIs and German Ifo might not blow the doors off, but unless they seriously disappoint, EUR/USD looks comfortable above 1.1200 and could punch through toward 1.1400 if Treasuries remain under pressure. The 1.15 mark still feels like a stretch without hard economic divergence or an outright U.S. policy pivot—but don’t rule it out if bond markets keep melting down.

Maybe we see a tactical bounce. S&P futures look less shell-shocked, and Treasuries are pausing for breath. But any pop in the dollar—especially above 100 DXY—is a fade until the fiscal smoke clears.

We’re in a phase where Treasury auctions, not central banks, are driving FX flows. That’s a paradigm shift—and traders ignoring the fiscal undertow do so at their own peril.

Today’s tax vote might be the last fig leaf before the bond vigilantes come knocking in size. With long-end yields blowing past 5% and equity markets wobbling, the FX market has gone from yawning at fiscal dysfunction to pricing it. Dollar bulls beware: we’ve exited the goldilocks chapter and entered the “pay me for the risk” era.

The script has flipped

The FX script has flipped. What was a dollar tailwind during Trump 1.0 is turning into a dollar headwind in Trump 2.0. Back then, tariffs were seen as growth-positive, inflation was tame, and the U.S. was the only game in town. Fast forward to today and you’ve got a very different setup: the greenback looks overvalued, the cycle’s rolling over, inflation risks are stickier, and debt sustainability is flashing red on every macro terminal.

Add to that a more seasoned global trade bloc. U.S. partners—especially in Europe—have had years to digest the tariff playbook and adapt. Rather than leaning on exports to offset damage, they’re now proactively bolstering domestic demand. Case in point: the EU’s latest initiative, rolled out this week, aimed squarely at boosting internal competitiveness. Spearheaded by industrial czar Stéphane Séjourné and drawing from the Draghi playbook, the EU is streamlining cross-border business rules to break down the fragmented regulatory maze that’s long stifled intra-EU trade.

The move introduces a new “small mid-cap” category—targeting the 38,000 firms stuck between SME and large-cap definitions—and hones in on eliminating the ten most damaging cross-border trade barriers, from packaging laws to waste labeling. It’s not going to light up euro futures today, but it lays the groundwork for a more self-reliant Europe—one that doesn’t need a booming China or tariff détente with Washington to stay afloat. Over the long haul, it strengthens the EUR case, especially in a world where the U.S. is slipping into fiscal quicksand.

Near term, there’s still some hope for a breakthrough. According to Bloomberg, the EU has tabled a revised trade deal proposal to the U.S., including a phased reduction of tariffs to zero on industrial and non-sensitive agricultural goods. That’s the olive branch. But let’s be honest—given Trump’s recent EU rhetoric, this one’s probably heading straight for the shredder. With a July 20% tariff threat still live, this could go either way. If there’s a surprise handshake, the euro gets a tailwind. If not, brace for tit-for-tat escalation.