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.
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.
Unlike the 2023 Treasury surprise that occurred when financial conditions were tight, today's actions have less potential to drive a major dollar sell-off. With Financial Condition Indexes (FCIs) already at their loosest levels in years, there is little room for further policy-driven easing to weaken the currency.
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 sharp outperformance of gold and Bitcoin following the Treasury's actions serves as a key indicator of a returning "dollar debasement" narrative. This rally in real assets signals market concern over policy unpredictability and credibility, and is now a crucial factor for FX strategists to monitor.
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.