For years, investors have leaned on a seemingly stable correlation: as U.S. Treasury yields rose, so did the strength of the dollar. This relationship made intuitive sense—higher yields suggested a healthy U.S. economy and attracted global capital, which in turn supported the greenback. But recent developments are challenging this long-standing dynamic.

In an unusual break from tradition, the U.S. dollar has weakened even as Treasury yields have risen. Since early April, the yield on the 10-year Treasury note has climbed from 4.16% to 4.42%, while the dollar has dropped nearly 5% against a basket of global currencies. This divergence is the sharpest in almost three years.

What’s Driving the Disruption?

At the heart of this decoupling lies a complex blend of fiscal concern, political volatility, and growing uncertainty about U.S. institutions—particularly the Federal Reserve.
Investors are becoming increasingly uneasy about the U.S. government’s rising debt and its long-term fiscal trajectory. President Trump’s recent re-election campaign rhetoric, including renewed tariff threats and heavy promotion of his earlier tax cuts, has put the spotlight back on America’s budget deficit. While tax cuts and increased spending have previously provided a short-term economic boost, they’ve also strained federal finances.
The situation was further exacerbated by Moody’s downgrade of the U.S. credit outlook. Though the country still retains a high credit rating, the move signals concern among global observers about the sustainability of America’s fiscal policy. Credit default swap spreads—a financial measure that reflects the perceived risk of a government default—are now trading at levels comparable to those of highly indebted European nations like Greece and Italy.

Fed Independence In The Spotlight

Adding to the tension is growing skepticism about the independence of the U.S. Federal Reserve. President Trump recently summoned Fed Chair Jerome Powell to the White House, reportedly pressuring him to lower interest rates. Such interference, while not unprecedented, has raised alarms on Wall Street.
“The strength of the dollar is underpinned by confidence in U.S. institutions—especially the Fed’s independence,” said Michael de Pass, global head of rates trading at Citadel Securities. “When that confidence erodes, so does the dollar’s appeal as a reserve currency.”
As policy becomes less predictable and more politically driven, the dollar—long viewed as a safe haven in global finance—is losing some of its sheen.

Implications For Investors

In recent years, holding the dollar served as a natural hedge against equity or bond market volatility. But that playbook may no longer hold.
“This changes everything,” noted Andreas Koenig, head of global FX at Amundi. “In the last few years, having the dollar long in the portfolio . . . was a very good stabilising factor. When the dollar is a balancing factor, you have a stable portfolio. If all of a sudden the dollar is correlated, it increases the risk.”
Strategists at a leading investment bank highlighted this shift in a recent note, stating that the combination of rising yields, a weakening dollar, and falling equity markets poses a challenge to traditional hedging models. The firm also flagged the possibility of fundamental shifts in cross-asset correlations, driven by increased uncertainty about U.S. fiscal discipline and Fed independence.
Another factor contributing to dollar weakness is the rise in hedge ratios. As investors seek to protect their exposure to dollar-denominated assets, they are increasing short positions on the currency—putting further downward pressure.

What Comes Next?

With market sentiment at a crossroads, many analysts recommend defensive positioning. Analysts are advising clients to consider greater exposure to currencies like the euro, yen, and Swiss franc—all of which have appreciated in recent months. They also suggest looking at gold as a buffer against potential further dollar weakness.
Whether this trend becomes a long-term norm or just a temporary dislocation remains to be seen. But for now, confidence in America’s economic stewardship is showing cracks, and that’s being reflected in the breakdown of some of the most reliable financial correlations.
As one UBS strategist put it, “When the dollar starts behaving like an emerging-market currency, it’s time to pay attention.”