The U.S. dollar's status as the world's premier currency could be at risk if the Federal Reserve intervenes in the bond market to curb rising interest rates, warns Fidelity's Jurrien Timmer.
What Happened: With the soaring U.S. debt, Timmer's analysis, shared on X, suggests that the Fed’s interference in the bond markets might erode the dollar's “supremacy.” This alludes to the USD’s edge as the global reserve currency.
Timmer's post highlighted the debt crisis, noting the rise in federal debt since March 2020, driven by COVID-era spending and a recent debt ceiling hike.
He warned of a potential "unsustainable debt spiral" if the term premium rises, forcing the Fed to suppress rates.
In a following post, he escalated the concern that "If the Fed is forced back into the bond market to hold down nominal and real rates, the dollar may well lose more of its supremacy premium." This interference, he argued, could weaken the dollar despite the Fed's hawkish stance.
The linkage lies in market dynamics: Fed bond purchases increase the money supply, devaluing the currency.
Timmer cited Japan's experience, where the yen fell against the dollar between 2011 and 2014, explaining that it is usually the currency that takes a hit in the presence of unsustainable fiscal policies.
"Currencies are the release valve for unsustainable fiscal policy, as Japan found out a few years ago." A weaker dollar could ease U.S. debt burdens by boosting exports, but it risks undermining global confidence.
Why It Matters: While these factors could rob the dollar of its reserve currency status, the members of the Donald Trump administration also intend to devalue the currency.
Chatham House expert David Lubin, in a note from April, explained that the “policy push” from Trump‘s administration aims to weaken the dollar permanently against other currencies, hoping to reduce the trade deficit and attract manufacturers to the U.S.
However, Lubin strongly cautioned against this approach, arguing that “if the international monetary system cannot rely on the dollar's full convertibility, or its availability in a crisis, it is entering unknown territory.”
“Undermining the dollar's global status would not only transmit huge amounts of additional uncertainty to the global economy, but would be a needless act of self-harm for the U.S.,” he added.
Price Action: The Dollar Index was down 9.33% on a year-to-date basis, where it was 0.34% lower at the 98.3970 level as of the publication of this article.
The SPDR S&P 500 ETF Trust SPY and Invesco QQQ Trust ETF QQQ, which track the S&P 500 index and Nasdaq 100 index, respectively, were slightly higher in premarket on Friday. The SPY was up 0.14% at $628.95, while the QQQ advanced 0.13% to $562.55, according to Benzinga Pro data.
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