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 market's stress test for carry trades has inverted. Before the Treasury's buybacks, the concern was if high-yield assets could withstand rising US rates. Now, the risk focus has shifted to the stability of low-yield funding currencies, like the Swiss Franc and Yen, which are vulnerable to unconventional policy surprises.

The U.S. dollar's decline is forecast to persist into H1 2026, driven by more than just policy shifts. As U.S. interest rate advantages narrow relative to the rest of the world, hedging costs for foreign investors decrease. This provides a greater incentive for investors to hedge their currency exposure, leading to increased dollar selling.

Typically, an energy shock and market turmoil would strengthen the US dollar. Its failure to rally significantly alongside falling stocks and bonds is a highly bearish signal, suggesting capital is actively leaving the US dollar system rather than seeking it as a safe haven.

In a regime of fiscal dominance, where government spending dictates policy, the currency, not bond yields, becomes the primary release valve for economic pressure. While equities and yields may appear stable, the true cost of stimulus will be reflected in a devaluing dollar, a risk often overlooked by bond vigilantes.

The combination of restrictive trade policy, locked-in fiscal spending, and a Federal Reserve prioritizing growth over inflation control creates a durable trend toward a weaker U.S. dollar. This environment also suggests longer-term bond yields will remain elevated.

The U.S. Dollar's value has been driven less by conventional factors like growth expectations and more by an unconventional "risk premium." This premium reflects market reactions to policy uncertainty, such as talk of FX intervention or tariffs. This has caused the dollar to weaken far more than interest rate differentials alone would suggest, creating a significant valuation gap.

Despite a surprisingly strong US payrolls report that should have supported the dollar by pushing back Fed rate cut expectations, the currency faded quickly. This counterintuitive reaction suggests the market has an asymmetric view, where strong labor data no longer provides a meaningful lift to the dollar.

The US dollar's recent slide is not just due to a pro-risk environment. Markets are also pricing in the government reopening, which involves running down the Treasury General Account (TGA). This action is expected to inject significant liquidity into money markets, placing short-term downward pressure on the dollar.