US Dollar: Safe haven status faces debt-market strains – Rabobank

Rabobank’s Senior FX Strategist Jane Foley discusses how rising global bond yields and mounting concerns over United States (US) fiscal discipline are challenging the traditional safe haven role of US Treasuries and the US Dollar (USD). Foley highlights changing Treasury ownership, higher term premia and gradual de-dollarisation as medium-term risks to USD support.

Treasury privilege and Dollar safe haven

"Bond yields across the world are displaying increasing unease, with the US 30 yr treasury bond among them. Last week demand for both the US 10 year note and 30-year bond auctions was decent, but in order to attract buyers, yields rose to multi-year levels. This morning, the US 30 yr yield has surged further to the highest level since 2007, with various other G10 bond yields also making multi-year highs."

"If the pressure on global bonds continues, it could be a test of its safe haven status. Traditionally, in times of elevated uncertainty both the treasuries and the USD gain. However, as was demonstrated last April after US President Trump’s tariff announcements, the erosion of the US’s exorbitant privilege could over time put both assets on a different footing."

"The US, however, has a significant budget deficit and no clear plan as to how to address it. Moreover, the ownership of treasuries has changed, with a higher proportion of paper now in the hands of hedge funds who can be more sensitive to price. The result may suggest that the treasury market could be less protected by ‘privilege’ going forward."

"We have frequently argued that the USD has its own set of fundamentals stemming from its dominance in the global payments system which should afford it a safe haven bid. That said, a more vulnerable treasury market will not be good news for the USD."

"That said, de-dollarisation may slowly erode the USD’s dominance in coming decades. This process would likely accelerate if the treasury market’s safe haven status becomes less anchored."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)