- The U.S. dollar is down nearly 9%, year to date. Yields on Treasuries have stayed high even though the stock market has gone down—the opposite of what investors normally expect. Some are blaming Japan and China for selling U.S. bonds, which would hurt the dollar. Others believe hedge funds unwinding leveraged positions in bonds may be to blame. But analysts and economists tell Fortune that as long as the White House continues to generate economic uncertainty, everyone is going to flee the dollar.
The value of the U.S. dollar ticked up yesterday after President Trump did a U-turn and said he had no intention of firing Jerome Powell, chair of the Federal Reserve. It was a rare piece of good news for the world’s “reserve currency,” whose value has fallen 9% year-to-date against the DXY index of foreign currencies.
That raises a question: Who is selling the dollar—or selling assets that drive down the dollar—and why?
Initial suspicions targeted Japan and China. After all, they are both seeing their export markets hurt by Trump’s trade war, and they are the first and second largest foreign holders of U.S. Treasuries. Perhaps those countries were trying to send a message to Trump: Remember, we can hurt you too!
However, sources tell Fortune that there is little to no evidence that either country is deliberately tanking the dollar.
And, perhaps surprisingly, there isn’t a great deal of evidence that hedge funds with liquidity issues were suddenly forced to unwind levered bets on U.S. bonds, forcing the recent selloff that dragged the dollar down with it, these sources say.
Rather, the blame lies with everyone else
Trump’s chop-change economic pronouncements have generated so much global uncertainty that investors across all assets—stocks, bonds, and currency—are simply withdrawing from the U.S. until some kind of certainty reappears.
Japan is selling a lot of all its foreign bond holdings—it dumped $20 billion recently—“not just U.S. Treasuries,” according to Oxford Economics’ Lead Analyst John Canavan. “Because Treasuries make up such a large portion of Japanese foreign bond holdings, it is generally seen as a good proxy.”
But, he says, “it’s not clear China and/or Japan have been responsible for the extent of the recent Treasury market selloff and volatility. Evidence is difficult to come by either way. Data on foreign transactions and holdings of Treasury debt tend to be released with a lag, so they could have played a role, but it doesn’t appear at first blush that they were the primary factor.”
Not the hedge funds
Canavan is also not keen on the hedge fund theory.
“Early suspicions that an unwinding of large leveraged basis trades were a significant factor appear to have been incorrect. The Commitments of Traders data from the CFTC over the past two weeks offered no evidence of any basis trade unwinds,” he told Fortune.
His colleagues at Goldman Sachs agree, in part.
In a note to clients published April 22, analysts Kamakshya Trivedi and Dominic Wilson said: “We did not see much support either in the ‘footprint’ across markets or in the flow data for the theories of significant foreign selling, though there is more evidence that levered unwinds (particularly the sharp move in swap spreads) may have played a role.”
China and Japan actually have a vested interest in not selling U.S. bonds because that only hurts their need for stable assets and would make their currencies rise, which in turn would hurt their export markets.
“Take China, for instance,” says Kevin Ford, FX & macro strategist at Convera.
“As America’s second-largest foreign creditor after Japan, it holds around $780 billion in Treasury securities. While their market moves are closely watched, a massive sell-off seems unlikely, as it would strengthen the Yuan due to repatriation effects, and Beijing is currently leveraging its currency to counter tariff impacts.”
“Hedge funds, on the other hand, might have added fuel to the fire. As the bond sell-off gained momentum, margin calls could have forced funds to liquidate Treasuries to raise cash, especially those employing bond-basis trades,” he told Fortune.
Everyone wants to get the hell out of Dodge
In fact, there is a simpler explanation: The dollar is in decline and yields on U.S. bonds are staying high because everyone—literally everyone on the planet—wants to get the hell out of Dodge City right now.
That includes stocks, bonds, and currency. With Trump changing his mind by the hour on trade policy and bullying his chief central banker on a daily basis, investors of all kinds are simply limiting their exposure to a nation they now regard as a risk asset rather than a safe haven.
This aversion to the U.S. has even started showing up in shipping routes. With tariffs restricting trade, the number of “blank sailings” to the U.S. by ocean freighters has doubled since February, according to data tracked by Project44, a supply chain platform. Blank sailings occur when a shipping line schedules a route and then cancels it altogether or skips a port on that route.
“The East Coast is set to see a peak of 24 blank sailings in the last week of May, a 100% increase since new tariffs began in February, with the West Coast close behind at 21, or a 31% increase,” the company says.
While shipping doesn’t directly affect the dollar, it is—arguably—a visible symptom of a world withdrawing from doing business with the U.S.
Wedbush analyst Daniel Ives, who covers the tech market, even has a name for it. In a note to clients dated April 22, he called it the “Sell America Trade.”
“This tariff/trade war is cutting US tech at the knees and helping steamroll China tech ahead,” he wrote.
And as long as the trade war continues, expect the dollar to continue to decline, according to Goldman Sachs.
“We believe the re-think of the risk and reward of Dollar assets has room to run and expect the USD to extend its declines over time,” Goldman’s Trivedi and Wilson said.
