A Flight from the Dollar?
The U.S. dollar and Treasury bonds are experiencing a concerning "triple yasu" effect—falling stock markets, rising bond yields, and a declining currency—signaling potential investor flight from American assets.
This pattern, historically associated with national decline in 1990s Japan, represents a far greater threat for America, whose currency and bonds serve as global safe havens. Since early April 2025, the dollar has fallen more than 4% against major currencies, while 10-year Treasury yields have risen by 0.3 percentage points. President Trump's tariff policies, combined with America's already precarious fiscal position with debt at 100% of GDP and a 7% budget deficit, undermine investor confidence in U.S. assets.
This threatens America's "exorbitant privilege"— the ability to sustain high deficits due to global demand for dollars—potentially creating a fiscal crisis similar to Britain's 2022 "mini-budget" disaster but with far greater global implications.
Secondary Effects
Global Financial Contagion: The U.S. Treasury selloff has driven borrowing costs higher globally, with Japanese 30-year government bond yields hitting 21-year highs and British 30-year yields reaching their highest level since 1998, threatening global economic stability.
Geopolitical Power Realignment: The declining attractiveness of U.S. assets suggests a potential shift in global investment flows away from America, which could accelerate de-dollarization efforts by rival powers and reduce American geopolitical leverage.
Monetary-Fiscal Policy Trap: Rising inflation expectations combined with higher government borrowing costs create a policy dilemma where the Federal Reserve cannot ease monetary policy to support growth without further undermining the dollar, while fiscal tightening could trigger a recession.
Scenario Forecasting (GCHQ Scale)
Remote Possibility (5-20%): Rapid restoration of confidence. The administration implements comprehensive fiscal reforms, central bank independence is reinforced, and inflation moderates quickly. Bond yields decline and the dollar stabilizes as fears of U.S. fiscal instability prove overblown. Global investors maintain or increase their Treasury holdings.
Realistic Possibility (25-50%): Managed decline scenario. The "steady state level of sustainable US fiscal deficits is moving lower," forcing a gradual fiscal adjustment. Dollar and Treasury assets experience continued volatility but avoid catastrophic collapse. The U.S. maintains much of its financial prominence but with higher borrowing costs and reduced fiscal flexibility.
Highly Probable (55-75%): Accelerated de-dollarization and sustained market stress. Treasury yields rise substantially as foreign investors reduce holdings, forcing painful fiscal cuts. The dollar loses significant market share in global trade and reserves, though remains an important currency. Inflation becomes entrenched above target, keeping monetary policy restrictive despite economic weakness.
Monday, April 14, 2025
