Why Confidence in US Dollar is Falling?

Context: Recently the US dollar has started losing value due to reciprocal tariffs.

What is the Bond Market?

• Bond = A Loan to Government or Company
  • When a government or company needs money, they borrow from investors by issuing “bonds”.
  • A bond is a promise to repay the money after a fixed time, with regular interest payments.
• Government Bonds = Very Safe Investments
  • Bonds issued by governments (like UK, US, India) are considered low-risk, because governments rarely default.
  • These are often called “sovereign bonds”.
• Bond Price and Yield
  • Bond Price: The cost of buying the bond in the market.
  • Yield: The return you get (like interest) from the bond.
  • If bond prices go down, yields go up, and vice versa.

Relation Between Bond Market and Currency Value

• Rising Yields = Investors Demand Higher Returns
  • If investors think a country’s economic policy is risky (like too much borrowing), they sell that country’s bonds.
  • This pushes bond prices down and yields up.
• Higher Yields = Higher Cost for the Government
  • The government has to pay more interest to borrow money in the future.
  • This can hurt government finances and investor confidence.
• Investor Confidence Affects Currency Value
  • If investors lose trust in a country’s economy, they may also lose trust in its currency.
  • They start selling the currency and pull out their money.
• Selling of Currency = Currency Weakens
  • If many investors sell a currency (like the pound), its value falls compared to other currencies (like the US dollar).
• Example: UK Under Liz Truss (2022)
  • Investors feared her tax-cut + spending plans would worsen debt and inflation.
  • They sold UK bonds → yields rose → lost faith in the pound → pound crashed to a 37-year low.

Why Confidence in US Dollar Falling?

• Investor Uncertainty due to Unpredictable Tariff Policies: President Trump’s tariff-heavy approach — especially against allies and adversaries alike — created global uncertainty.
  • Lack of clarity on end goals and arbitrary tariff rates spooked global markets, leading investors to diversify away from the US dollar.
• Rising US Government Bond Yields: Investors sold US government bonds, causing bond prices to fall and yields to rise.
  • High yields typically attract investors, but in this case, rising yields were interpreted as a sign of increased risk and poor fiscal management (especially with national debt exceeding $35 trillion).
  • Result: Investors demanded higher returns, signaling lower trust in long-term US financial stability.
• Shift to Other Stable Currencies: With rising global volatility, investors traditionally prefer to the US dollar. However, during this phase, they preferred the euro, yen, Swiss franc, etc.
  • This shift shows a loss of faith in the dollar as a “safe haven”, a title it held for decades.
• Falling Oil Prices & Energy Market Woes: Trump’s policy of energy dominance (“drill baby drill”) was hit by slumping crude oil prices.
  • Below $60/barrel, US shale oil becomes uneconomic, threatening one of the key pillars of US trade power.
  • This undermined investor confidence in the US energy-backed economic narrative.
• Huge US Debt Burden: With $35 trillion+ in national debt, rising yields mean the US has to pay more in interest.
  • This raises concerns about long-term debt sustainability, pushing investors away from US assets and reducing dollar demand.
• Political Interference & Policy Instability: The Federal Reserve’s independence has been a key reason behind global trust in the dollar.
  • Any signs (even indirect) of political interference in monetary policy (as feared under Trump) undermines investor faith in the system’s credibility.

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