The tight connection between the dollar and US Treasury yields has broken for the first time in years, and investors are not shrugging it off.
Since early April 2025, when President Donald Trump introduced his new “liberation day” tariffs, the 10-year yield rose from 4.16% to 4.42%, but the dollar didn’t follow, it dropped instead, losing 4.7% against a basket of other major currencies.
That kind of dislocation hasn’t been seen since mid-2022, and it’s forcing traders and funds to rethink how they hedge against volatility.
According to Financial Times, the usual pattern was simple: rising yields meant a stronger US economy, which brought in foreign capital and boosted the dollar. But right now, that story doesn’t hold. Investors are questioning the reason behind the rising yields, and it’s not confidence. It’s concern.
Concerns about exploding deficits, a downgraded credit rating, attacks on the Fed, and unpredictable policymaking are turning what should be a sign of strength into a warning signal.
Trump pressures Powell while debt fears hit US credibility
Donald Trump’s policies are driving this break. His tax bill may have passed, but it’s done damage. It added to the deficit, and Moody’s wasn’t impressed. It downgraded the US credit rating, something that added more pressure to bond prices.
The cost of insuring US debt against default is now at the same level as Greece and Italy, two countries nobody wants to be compared to financially.
Oh but Trump didn’t stop there. He summoned Federal Reserve Chair Jay Powell to the White House just this Friday and lied that he told him point-blank that not cutting rates was a “mistake,” whereas Powell’s statement said he didn’t even let the conversation go there.
Still, that meeting rattled investors, especially because of what Michael de Pass, Citadel Securities’ global head of rates trading, explained: the dollar’s strength has always come from trust in American institutions.
“The rule of law, independence of central banking, and policy that’s predictable—these are the components that create the dollar as the reserve currency.” But now, he added, “a major concern for markets right now is whether we are chipping away at the institutional credibility of the dollar.”
That loss of trust is being reflected everywhere. UBS strategist Shahab Jalinoos explained that when yields go up for the right reasons—like strong growth—it attracts capital. But when they rise because people are worried about risk, it causes outflows.
“If the yields are going up because US debt is more risky, because of fiscal concerns and policy uncertainty, at the same time the dollar can weaken,” Shahab said. And that’s exactly what’s happening.
Investors hedge against dollar, turn to gold and safe currencies
The current breakdown is also reshaping portfolio strategy everywhere. Andreas Koenig, head of global FX at Amundi, said this is a problem for people who depended on the dollar to balance their portfolios. “When the dollar is a balancing factor, you have a stable portfolio. If all of a sudden the dollar is correlated, it increases the risk.” That sentence is getting repeated on every trading floor right now.
Goldman Sachs analysts said in a Friday note that the unusual combination of a weaker dollar, higher yields, and declining equity prices is hurting the two main tools used to hedge volatility. With all three now moving in the wrong direction, portfolios are left more exposed.
Funds and asset managers are responding fast. Many are now hedging their dollar positions more aggressively, and some are outright shorting the currency.
Jalinoos from UBS warned, “The more policy uncertainty there is, the more likely it is that investors will raise their hedge ratios.” And when hedge ratios rise across the massive pile of dollar-denominated assets, “you’re talking about many billions of dollars of selling [the US dollar],” he added.
That rush to hedge is already being reflected in market positions. Goldman Sachs said the best strategy now is to expect further dollar weakness, especially against the euro, yen, and Swiss franc – currencies that have all gained in recent weeks.
They also recommended an increased position in gold, saying the current situation “creates a strong basis for some allocation to gold.”
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