Rabobank Senior FX Strategist Jane Foley notes renewed debate over USD debasement after reports that Chinese regulators urged local institutions to curb US Treasury holdings, leaving the Dollar softer. Foley stresses that record foreign demand for Treasuries still supports the USD’s safe-haven role, but fiscal concerns and large US debt loads are increasing volatility and driving a choppy outlook for many USD crosses.

Debasement fears and fiscal anxiety

"This week it is back on the agenda following yesterday’s reports that Chinese regulators have advised domestic financial institutions to curb holdings of US Treasuries due to concerns over the concentration of risk and market volatility."

"Warsh’s nomination countered these fears because if he were to be successful in reducing the size of the Fed’s balance sheet, it would shrink money supply and limit the supply of USDs."

"Ever since the value of treasuries plunged in the wake of Trump’s tariff address last April, the market has been questioning whether there has been any change in the ability of the treasury market to maintain that function."

"It is becoming increasing obvious that markets are anxious about fiscal issues and, although FX is typically led by movements in short-term interest rates, this is being played out in currency markets."

"We remain of the view that many of the USD crosses will be choppy this year as the market reacts to the newsflow."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)