News stories abounded in the last two days reporting that the US Dollar (DXY index) had the worst first half since 1973. See examples below:

Financial Times:

Bloomberg:

The New York Times:

The Wall Street Journal:

Also, stories from the New York Post, The Guardian, Newsweek, and Business Insider.

It is a popular topic. All these articles explain this is because of the Trump Administration’s trade and fiscal policies and attacks on the Fed’s independence, but they leave out that that the 10-year Treasury yield has fallen about 50 basis points from its mid-January high which naturally weakens the Dollar. This yield drop doesn’t explain how much the Dollar has fallen (more below) but the Dollar is naturally correlated to Treasury yields because higher interest begets more investment and vice-versa. Across the political spectrum, many want the Dollar’s narrative to be about the Trump Administration as a rebuke to its policies, but it only decoupled from the 10-year Treasury yield for one week and has been well-correlated before and since. The Dollar hasn’t made back what it lost in that week, but it isn’t getting any worse. Recent declines in the Dollar mostly reflect that interest rates have fallen.

On Monday, April 14th, 2025, I wrote a piece “What happened last week”, chronicling a strange week the week before (4/7-4/11) for the Treasury market and Dollar which was reminiscent of a period from COVID-19 (March 2020) where investors sold Treasuries and the Dollar simultaneously, something worse than the normal reaction in times of stress that benefit Treasuries and the Dollar (flight-to-quality). This most recent period happened right as the Trump Administration raised tariff levels to their highest levels of 28% (effective tariff rate, Yale Budget Lab.) The world was scared enough of what this would do the global economy, that cash was favored over Treasuries and domestic currencies over the Dollar. I call it the “dash for cash” week. During that week, the Dollar fell 2.8% and the 10-year Treasury yield rose 50 basis points. Since then, the Dollar has fallen further (-3.3%) but so have 10-year Treasury yields (-21 basis points), their typical correlation. The charts below show the Dollar versus the 10-year yield (first chart) and what those series look like by removing the effect of the “dash for cash” week (second chart); pretty well correlated.

If the difference between the 10-year yield and Dollar is essentially limited to one week based on tariff fear, it is hard to extrapolate that to fiscal fears and Fed independence. Observing how strong the desire is for Treasury yields to rise to force the government to spend less throughout my 25-year career (the mythical bond-market vigilantes), I notice the same sentiment impacting discussion of the Dollar now, yet neither are actually happening. Treasury yields rose in April and May from the tariff climbdown and the Fed’s counter-economic pause for tariffs. There may have been some days near the top of that move where fiscal fears were driving yields (in the week after Moody’s downgrade), but the enormous budget bill is close to being passed and the 10-year has fallen 30+ basis points from its May highs. How could that move have been about fiscal fears if it is unwinding without anything getting better fiscally? The bond market and sovereign CDS spreads seem to care more that the bill will be passed to raise the debt ceiling than how big it is. Note that Treasury auctions were normal before, during, and after that sell-off period and the spread between the 2-year and 10-year (about 50 basis points) is normal for this part of the business cycle. Term premium for the 10-year Treasury rose (Adrian, Crump, and Moench model), but it has a strong correlation to the absolute level of yields and has since come down about the same amount that the 10-year yield has come down.

During and after that sell-off, the bond market behaved according to the model I’ve observed so many times. Yields rise from a fundamental reason (a change to the outlook for growth and inflation), but as they rise, enough people point at the move and scream “fiscal fears” that others believe it is the cause just from the discussion surrounding it, not because it is the reason. At the top, the move becomes vaguely related to fiscal fears in a meta kind of way, but then the outlook for growth and inflation reverses (in this case, economic data has weakened and expanded into the labor market and consumer, LDEI) and yields come back down without the fiscal situation improving. This isn’t to condone fiscal largesse, but to point out that it doesn’t predict where interest rates are going. By the most important fiscal solvency statistic, the debt service to GDP ratio at 3%, the US is not seemingly near a place where there would be a fiscal crisis — it is the hope for one to force a policy change that consumes discussion of the topic. Treasury yields and the US Dollar are political footballs, and that bias must be separated out to see what’s really going on.