- US goals on rates, defence spending, sanctions, and dollar usage are internally inconsistent.
- High US short-term and long-term rates will continue to support dollar demand.
- US pressure for a stronger yen is at odds with domestic forces lifting US yields.
- A loss of USD safe-haven status would roil commodities, rates, bonds, and credit.
- Overreach on sanctions, cyberattack on USD clearing, and fiscal dysfunction are key tail risks.
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COMMENTARY: USD-UST Tension
The US authorities have expressed a series of goals in recent years, some of them at odds with each-other. There is a desire to see lower interest rates, but that doesn’t quite work with a push to boost defence spending substantially while not cutting anything else. There are concerted efforts to restrict access to USD payment rails for certain countries or companies, but there are also measures like the Genius Act to encourage more usage of USD assets. On the dollar, there have been conflicting messages—some want a weaker currency to help restore export competitiveness while discouraging imports. Some favour tariffs that, by changing the relative value of tradable goods, favour a stronger dollar.
Some of these policy contradictions are facing glaring spotlight presently. The US is pushing Japan to raise interest rates and nudging it to intervene to push up the yen. But at the same time, US interest rates are rising in response to inflation, AI spending, and fiscal slippage. With Fed Funds Rate at 3.75% and 10-year treasury yields heading toward 5%, the pull of USD will remain, in our view. Engineering a prolonged, weak dollar cycle is going to be difficult.
There is of course an adverse scenario in which the USD and USD-denominated assets lose their safe-haven status, prompting a run on the dollar. It would be a lose-lose scenario for the global economy as there would be ensuing market volatility, surge in gold and other commodity prices, and sharp rise in interest rates in the US. The associated spillovers to global money, bond, and credit markets would be largely negative.
What would be the trigger of such a scenario? Overzealous and ever-widening pursuit of sanctions by Washington, wider weaponisation of the USD, a cyberattack on dollar clearing systems, political dysfunction in Washington causing relentless widening of the fiscal deficit, all of these could be proximate causes.
Beyond thinking through policy contradictions and doomsday scenarios, two important considerations remain for the steady state. While rates are going up in Japan, Europe, US, and elsewhere, fundamentals don’t warrant 2022-type tightening of conditions, as there is no post-pandemic demand surge type dynamic at place. Second, some moderation of the AI boom and some progress toward peace in West Asia may be sufficient to put a lid on the short-rates, short-dollar narrative.
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The information herein is published by DBS Bank Ltd and/or DBS Bank (Hong Kong) Limited (each and/or collectively, the “Company”). It is based on information obtained from sources believed to be reliable, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. This research is prepared for general circulation. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. The information herein is published for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Company or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Company and its associates, their directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking or financial services for these companies. The information herein is not directed to, or intended for distribution to or use by, any person or entity that is a citizen or resident of or located in any locality, state, country, or other jurisdiction (including but not limited to citizens or residents of the United States of America) where such distribution, publication, availability or use would be contrary to law or regulation. The information is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction (including but not limited to the United States of America) where such an offer or solicitation would be contrary to law or regulation.
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Related insights
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- Market Pulse: Crude Realities14 Sep 2026