The Dollar: Debt-Crisis Fears Test the Greenback

A similar disconnect is now visible in Washington. The Treasury's purchase of long-term bonds, Bessent's preferred tool, resembles quantitative easing and expands the Federal Reserve's balance sheet. Fed Governor Kevin Warsh has insisted on shrinking it. Chair Jerome Powell has said rising bond yields can help curb inflation. Bessent appears ready to do everything possible to push yields lower. Such contradictions between fiscal and monetary policy tend to weaken the national currency.

The pound was not the only example. When Sanae Takaichi came to power in Japan, concerns over new fiscal stimulus alongside the BOJ's tightening sent the yen to 40-year lows. The dollar is now facing a similar dynamic: stock indices have fallen, Treasury yields have stabilized, and oil prices have risen on Middle East tensions. Those conditions would normally support a safe-haven bid for the greenback. Not this time.

Bessent's methods are undermining confidence not only in the Fed's independence but in the dollar itself, traders said. The difference between the Treasury's intentions and its actions remains wide. Nothing terrible has happened yet. Once markets settle, the dollar could recoup some of its losses.