The dollar is meant to be a source of safety. Lately, however, it has been a cause of fear.
Since its peak in mid-January the greenback has fallen by over 9% against a basket of major currencies. Two-fifths of that fall has happened since April 1, even as the yield on 10-year Treasuries has crept up by 0.2 percentage points. That mix of rising yields and a falling currency is a warning sign: if investors are fleeing even though returns are up, it must be because they think America has become more risky.
Rumors are rife that big foreign asset managers are dumping greenbacks.
For decades investors have counted on the stability of American assets, making them the keystones of global finance. The depth of a $27t trillion market helps make Treasuries a haven; the dollar dominates trade in everything from goods and commodities to derivatives.
The system is buttressed by the Federal Reserve, which promises low inflation, and by America’s sturdy governance, under which foreigners and their money have been welcome and secure. In just a few weeks President Donald Trump has replaced these ironclad assumptions with stomach-churning doubts.
This crisis-in-the-making was created in the White House. Mr. Trump’s reckless trade war has raised tariffs by roughly a factor of 10 and created economic uncertainty. Once the envy of the world, America’s economy is now courting recession, as tariffs rupture supply chains, boost inflation and punish consumers.
This comes as America’s historically bad fiscal position is becoming even worse. Net debts stand at about 100% of GDP; the budget deficit over the past year, of 7%, was astonishingly high for a healthy economy. 
Yet in its quest to renew and extend tax cuts from Mr. Trump’s first term, Congress wants to borrow still more. On April 10 it approved a budget blueprint that could add $5.8 trillion in deficits over the next decade, according to the Committee for a Responsible Federal Budget, a think-tank. That would boost the deficit by another 2 percentage points and exceeds the combined total value of Mr Trump’s first-term tax cuts, the extra spending in the covid-19 pandemic and Joe Biden’s stimulus and infrastructure bills. It could double the pace at which the debt-to-GDP ratio rises in the coming years.
What makes this economic downturn and the loss of fiscal discipline so explosive is the fact that markets are starting to doubt whether Mr. Trump can govern America competently or consistently.
The shambolic, incoherent way the tariffs were calculated, unveiled and delayed was a mockery of policymaking. On-again, off-again exemptions and sectoral tariffs promote lobbying.
For decades America has carefully signaled its dedication to a strong dollar. Today some White House advisers are talking about the reserve currency as if it were a burden to be shared — using coercion if necessary.
Inevitably, this puts the Federal Reserve under strain. Mr. Trump is pressing the central bank to cut interest rates. The courts are likely to stop him sacking Fed governors at will, but he will be able to nominate a pliant new Fed chair in 2026.
Meanwhile, the president’s other policies — such as shipping undocumented migrants to El Salvador without a hearing, or harassing law firms that displease him — make it possible to think that foreign creditors’ rights could suffer.
All this has created a risk premium for American assets. The shocking thing is that a full-blown bond-market crisis is also easy to imagine. Foreigners own $8.5 trillion of government debt, a bit under a third of the total; more than half of that is held by private investors, who cannot be cajoled by diplomacy or threatened with tariffs. America must refinance $9 trillion of debt over the next year. If demand for Treasuries weakens, the impact will quickly feed through to the budget, which, owing to high debts and short maturities, is sensitive to interest rates.
What would Congress do then? When markets collapsed during the global financial crisis and the pandemic, it acted forcefully. But those crises required it to spend, not to impose cuts. This time it would need to take an ax to entitlements and raise taxes quickly. You need only consider the make-up of Congress and the White House to see that the markets might have to impose a lot of pain before the government could agree on what to do.
As America dithered, the shock could spread from Treasuries to the rest of the financial system, bringing defaults and hedge-fund blow-ups. That is the sort of behavior you would expect in an emerging market.
