The US dollar has been experiencing a sharp decline in recent days, raising concerns about global confidence in the US. Since the start of the second Trump administration, the dollar has generally remained stable, but this trend may be reversing due to rising US interest rates. The dollar’s fall against its G10 peers is particularly worrying, especially when compared to the 2y2y forward interest differential, which typically supports the dollar.
Historically, a rise in the interest differential tends to boost the dollar as it indicates stronger growth or higher inflation. However, recent price action has been counterintuitive, with the dollar falling even as rate differentials rose sharply. This is reminiscent of the 2022 episode in the UK, where rising yields led to a debt crisis.
The latest fall in the dollar comes amid rising US interest rates, which is unusual given that higher rates typically support the currency. The situation may be signaling that tariff uncertainty is now bringing things to a head after years of loose fiscal policy.
In summary, the current trend of the dollar’s decline is concerning and warrants further attention. As the ultimate metric for global confidence in the US, the dollar’s performance will continue to be closely watched in the coming months.
Source: https://www.brookings.edu/articles/worrying-signs-for-the-us-dollar