Contrary to fears of a spike, a major rise in 10-year Treasury yields is unlikely. The current wide gap between long-term yields and the Fed's lower policy rate—a multi-year anomaly—makes these bonds increasingly attractive to buyers. This dynamic creates a natural ceiling on how high long-term rates can go.

The US dollar failed to strengthen when long-end Treasury yields rose but weakened significantly when Treasury buybacks forced them down. This asymmetric reaction suggests that holding dollar short positions is less risky, as they are not as vulnerable to being "torpedoed" by rising yields.

Arguments for dollar weakness based on Treasury activism are fragile. The dollar's ultimate direction still depends on the Federal Reserve's conventional, data-driven reaction function. If US data remains strong and the Fed continues its projected path, the Treasury's moves will likely prove to be a short-term distraction.

The Fed's long-standing asymmetric dovish reaction function, which has weighed on the dollar, is neutralizing. Internal dissents and Chairman Powell's commentary signal a more balanced policy stance, which could shift from being a dollar headwind to a tailwind depending on incoming economic data.

The US dollar has been trading cheaply relative to interest rates. A hawkish Fed outcome could trigger a rally as the currency closes this 'misvaluation' gap, even if short-term rates don't reprice significantly. This suggests the dollar has a valuation-based tailwind independent of immediate policy moves.

Over the past few years, the Treasury Department and the Federal Reserve have been working at cross-purposes. While the Fed attempted to remove liquidity from the system via quantitative tightening, the Treasury effectively reinjected it by drawing down its reverse repo facility and focusing issuance on T-bills.

Despite fears of fiscal dominance driving yields up, US bond yields have remained controlled. This suggests a "financial repression" scenario is winning, where the Treasury and Federal Reserve coordinate, perhaps through careful auction management, to keep borrowing costs contained and suppress long-term rates.

The current environment is not a repeat of the 2025 dollar debasement. The most damaging scenario for the dollar is rising term premium alongside a Fed with an easing bias. Today, the Fed maintains a hiking bias, preventing the front-end rate collapse needed for a similar sustained dollar sell-off.

The dollar's resilience to disappointing US economic data stems from the market's low starting point for Fed rate hike expectations (less than two hikes priced in). This creates a high bar for further dovish repricing, effectively putting a floor under the currency.