Experts Warn Weakening Dollar Signals ‘Crisis of Confidence’ in Backbone of Global Markets

The U.S. dollar is on track to have its worst month in years, a development that has alarmed some experts worried about crumbling faith in U.S. financial stability.

The U.S. Dollar Index has declined more than 4.3% since the start of the month. If the index held steady for the remainder of April, it would be the U.S. dollar’s worst month since November 2022 and its ninth-worst since 2000. With March’s 3.2% decline, the dollar is on track to have its worst two-month stretch since 2002. 

Are Investors Shunning Dollar-Based Assets?

The dollar’s decline has puzzled market watchers, including former Treasury Secretary Janet Yellen, who called the recent moves in the world’s reserve currency part of “a very unusual pattern” during an interview with CNBC on Monday. 

Yellen explained that investors tend to gravitate to safe havens like U.S. Treasury securities during times of market uncertainty. Increased demand for Treasurys, she said, usually boosts the dollar since Treasury bonds can only be traded in dollars. But recently Treasury yields have skyrocketed and the dollar has declined. 

“And what that suggests is that investors are beginning to shun dollar-based assets, and [are] calling into question the safety of what is the bedrock of the global financial system, namely U.S. Treasurys,” said Yellen. 

Why Are Treasurys and the Dollar Falling?

Experts have several theories about why investors aren’t flocking to Treasurys amid all the market turmoil. Some have speculated it’s because tariffs threaten to fuel U.S. inflation, which would force the Federal Reserve to keep interest rates elevated. Another possible reason is reduced demand from international investors and other countries spooked by the Trump administration’s unpredictability and hostility to the global order. 

Some have speculated that China, one of the largest foreign owners of Treasury debt, is dumping its bonds to retaliate against Trump. There’s very little data available to support that theory, according to a research note from MUFG published Monday. Though they note China has reduced its Treasury holdings by about 25% since the end of 2021, “possibly anticipating what lies ahead.” China has also been a major advocate for global de-dollarization.

Yellen on Monday said China dumping Treasurys and dollars would create “risks to the Treasury market and to global financial stability that would harm them and would represent a very significant escalation. So, it’s not something that I would expect China to do.”

Can Trump Restore Faith in the Dollar?

Analysts are concerned Trump’s on-again, off-again approach to tariffs has eroded confidence in U.S. assets. MUFG analysts cited a disconnect between the U.S. dollar’s value and rate spreads for their assessment that Trump’s tariffs have created “a crisis of confidence” in the dollar. Yellen said the “loss of confidence in U.S. economic policy and the safety of bedrock financial assets is really very worrisome.”

Restoring faith in the stability of the dollar and Treasurys may be difficult. Equity markets were buoyed on Monday by Trump’s announcement over the weekend that semiconductors and many consumer electronics wouldn’t be subject to so-called reciprocal tariffs. But to the analysts at MUFG, “the reprieve is just another example of the elevated level of policy uncertainty that will continue to undermine confidence in US assets.”

Rebuilding trust would require Trump and China to backtrack on their recent tariff increases, and Congress to develop a plan to narrow the deficit, MUFG analysts said. Neither is likely in their view. 

“In the near-term it is difficult to see any fundamental factor that will likely improve investor sentiment,” the analysts wrote. “And rhetoric from Trump and (Commerce Secretary) Lutnick, despite the reprieve, does not point to any reason for optimism on a more fundamental shift in policy that would prompt a dollar recovery.”