Trump's budget policies shatter long-standing bond-dollar correlation, sparking worldwide market nerves

Trump's budget policies shatter long-standing bond-dollar correlation, sparking worldwide market nerves

The long-standing correlation between a rising US Treasury yield and a rising dollar has collapsed, a trend that analysts trace back to investor concern regarding President Donald Trump's fiscal and monetary policy interventions. The divergence, first witnessed among emerging markets, is rattling global portfolios and causing concern about the dollar acting as the world's reserve currency, the Financial Times reported.

Since Trump's "liberation day" tariffs were announced in early April, 10-year US bond yields have risen from 4.16% to 4.42%, and the dollar has weakened by 4.7% against a basket of currencies at the same time. The correlation between the dollar and yields is said to be at its weakest level in close to three years, according to analysts.

From haven to hazard: changing investor sentiment

"Usually, greater yields imply economic health and draw in foreign capital," said Shahab Jalinoos of UBS. "But if those yields increase because debt risks are escalating and policy is coming in more erratically, the dollar will drop. That's more typical of emerging markets."

The contrast is particularly vivid in light of the fact that, for several years, increasing US yields consistently indicated investor optimism about America's economic path. Today, though, investors perceive them as signals of distress—driven by Trump's forceful spending, credit downgrade, and political meddling at the Federal Reserve.

Trump's Fed battles and tax cuts alarm

Trump's "big, beautiful" tax bill and Moody's recent downgrade of US debt have fuelled concern over fiscal sustainability. Apollo economist Torsten Sløk said that US credit default swap spreads are now similar to those of highly leveraged European countries such as Greece and Italy.

In addition, Trump's public criticisms of Fed Chairman Jay Powell—and his latest call for Powell to lower interest rates in a White House meeting—have undermined investor confidence even further. "We are eroding the institutional credibility of the dollar," warned Citadel Securities' Michael de Pass. "That credibility is what supports the US dollar's reserve status." Portfolio hedging strategies upended

The consequences of these events are reverberating around the world's investment plans. Keeping dollars in a portfolio was a sure bet hedge for two decades of choppy markets. But that role is no longer assured.

"This is changing everything," said Andreas Koenig at Amundi. "If the dollar ceases to be a balancing factor, portfolio risk increases."

Goldman Sachs analysts repeated this fear in a note to clients, stating that the "recent trend of dollar softness accompanied by higher yields and lower stock prices has challenged both of the typical portfolio hedges."

Currency hedging and gold become more popular

Amid uncertainty, investors are increasingly hedging their dollar exposures, effectively shorting the currency and accelerating its decline. “If hedge ratios increase on the existing stock of dollar assets, you’re talking about many billions of dollars of selling,” UBS’s Jalinoos said.

Goldman strategists now encourage investors to position for persistent dollar weakness—especially versus the euro, yen, and Swiss franc—and suggest higher gold allocations as a hedge against fiscal and monetary instability.

As Trump keeps remaking US economic institutions, markets are telegraphing profound unease—expressed not only in the decline of the dollar, but in a profound change in how investors assess America's financial credibility.