The Dollar’s Foundation Is Shaking
For almost eight decades, the U.S. dollar held the dominant position in global trade and finance. As the world’s primary reserve currency, the dollar allowed Washington to borrow at low cost and finance large deficits without pressure. Treasury bills long served as a universal safe haven for investors. Arvind Krishnamurthy, professor at Stanford University, explained, “The world wants to hold their wealth in a safe and liquid place, and the U.S. has been the provider of that.”
This dominant position now faces growing doubt. Investor behavior across bond and currency markets points to a shift that challenges the status of U.S. Treasurys as the safest asset on the planet.
Investors Signal Their Doubt
Following President Trump’s tariff announcements on April 2, markets responded in an unusual way. Rather than seeking safety in the dollar and U.S. debt, global investors retreated. Yields on Treasury bonds climbed while the dollar’s value dropped. “Yields on Treasurys and investments in dollars suddenly increased… the dollar should have appreciated… Instead, its value fell by more than 3%,” said Krishnamurthy, citing research from Stanford Graduate School of Business.
This reversal contradicts patterns observed during the 2008 financial crisis and the COVID-19 pandemic, when investors flocked to dollar-denominated assets. “This pattern looks clearly different,” Krishnamurthy stated.
Uncertainty Fuels the Exodus
Trump’s trade policy injected volatility into markets. Robert Reich, former U.S. Secretary of Labor, warned that “uncertainty is the enemy of economic growth.” He said that American companies spent over a year rebuilding supply chains after the pandemic. With the reintroduction of tariffs, those efforts unraveled. “Nobody wins from a trade war,” Reich stated. He also noted that manufacturing jobs will not return because automation, not trade, caused their disappearance.
The chaotic and shifting direction of economic policy created what Reich described as the most uncertain environment for investors in 50 to 60 years. That uncertainty prompted foreign investors to question the safety of both the dollar and U.S. debt.
Foreign Buyers Want a Premium
Investors once paid a premium to hold U.S. debt. That behavior has stopped. “The willingness of foreign investors to pay a bit extra for Treasurys — that’s gone,” said Hanno Lustig, professor at Stanford University. The research team calculated that European investors demanded an additional 2.2 percent yield to hold Treasurys after the April announcement.
This shift reflects a deeper loss of trust. During the 2008 crisis, investors willingly gave up returns to access the stability of the U.S. market. That tradeoff no longer seems acceptable.
A Downgrade Without Relief
Moody’s recently downgraded the U.S. sovereign credit rating from Aaa to Aa1. The agency cited Washington’s growing deficit and rising interest obligations. Ray Dalio, founder of Bridgewater Associates, warned that Moody’s failed to capture the full scope of the danger. “They only rate the risk of the government not paying its debt,” he wrote. “They do not include the greater risk that the country will print money to pay its debts.”
Dalio warned that inflation caused by such policies would hurt bondholders more than outright default. He explained that the risk lies not in receiving fewer dollars, but in receiving dollars worth far less.
Investors Rethink American Assets
PIMCO, which manages about $2 trillion, advised clients to reduce exposure to U.S. Treasurys and the dollar. Marc Seidner and Pramol Dhawan from PIMCO wrote, “With its protectionist policy pivots, the U.S. is giving investors worldwide an occasion to rethink long-held assumptions.” Their note explained that foreign bonds in Europe, the UK, and emerging markets now appear more attractive than U.S. debt.
They warned that rapid shifts in American policy could result in a financial structure no longer centered around U.S. assets.
Market Patterns Mirror Emerging Economies
Will Compernolle, macro strategist at FHN Financial, said, “There has been a flight away from U.S. assets at the margin, but there is no next obvious competitor.” Despite the absence of an alternative, investor moves reflect patterns more often associated with weaker economies.
The dollar’s decline came alongside rising yields and falling equities, a rare combination. This mirrored the U.K. bond market turmoil that forced Prime Minister Liz Truss to resign in 2022. The concern now centers on whether the U.S. faces similar consequences from unchecked deficits and rising borrowing costs.
American Households Face the Fallout
Consumers now face higher interest rates on mortgages, car loans, and credit cards. As yields rise, borrowing becomes more expensive. Inflation pressure adds to the cost of imported goods. Investment portfolios have suffered from falling bond and equity values, which threatens long-term savings and retirement plans.
Stephen Innes of SPI Asset Management suggested that investors are searching for alternatives. He noted a surge in Bitcoin after Trump’s “Liberation Day” announcement, signaling that investors may be protesting policy through market actions.
Loss of Trust Has Lasting Implications
Frank Warnock, professor at the University of Virginia and research advisor at the Federal Reserve Board, emphasized the role of trust. “Once the trust is violated, how easy is it to put back in?” he asked. Marc Chandler of Bannockburn Capital Markets compared it to toothpaste spilled into a sink — impossible to restore to its original state.
As trust fades, America’s reputation as a stable economic leader begins to deteriorate. Investors must now weigh not just returns, but the integrity of the financial system itself.
A Shift That Cannot Be Ignored
Neil Irwin at Axios explained the broader concern. “There are signs everywhere… that U.S. policymakers have less room to maneuver than they may have thought.” Bond markets now reflect concern about long-term deficits, interest payments, and policy direction.
The downgrade, capital flight, and loss of confidence suggest a fundamental shift. James Carville, former advisor to President Clinton, once said he wanted to be reincarnated as the bond market because of its power. Today, that power is flexing against the U.S. government itself.
The dollar’s position, once unquestioned, now faces resistance. The rise in Treasury yields, the premium demanded by foreign buyers, and the decline in dollar value all point to a broader rejection of America’s economic strategy.
