The "Dollar Debasement Trade" was a big theme in global financial markets last year. The thesis was that President Donald Trump's aggressive tariff hikes would revive inflation in the US and undermine foreigners' confidence in the US's reliability, especially among America's allies. In addition, the president's attacks on Fed Chair Jerome Powell threatened the Fed's independence and heightened concerns that a compliant Fed would keep rates artificially low to finance widening federal budget deficits. In this scenario, foreign investors would respond by selling the US dollar and US securities in favor of foreign currencies and securities, gold, Bitcoin, commodities, and other non-US assets. The result would be a bad combination of rising US Treasury bond yields, falling US equity prices, and a weaker dollar. Following Trump's Liberation Day tariffs on April 2, 2025, and his attacks on the Fed, that scenario briefly materialized, with the dollar falling, equities declining, and yields rising.
We were rightly skeptical about this so-called "Sell America Trade." As tariff concerns eased and recession fears abated, the debasement narrative lost momentum. Its credibility might have ended last Wednesday, when Fed Chair Kevin Warsh made price stability his top priority at his first FOMC monetary policy meeting. Traders rapidly priced in two rate hikes by early 2027, bolstering the dollar.
Consider the following developments suggesting that the debasement trade is kaput.
