The New American Weapon: A Weak Dollar

Since the beginning of the year, the greenback has already fallen by nearly 10%, reaching a new low.

Historically, a fall of this magnitude is rare: you have to go back to 2020, in the midst of the health crisis, or to 2017 to find an annual decline of around 10%. The difference is that today, the dollar's weakness is not the result of an external shock, but rather a deliberate action by the authorities to preserve financial stability. In other words, the dollar is becoming the balancing instrument of a system weakened by massive debt and the Treasury's colossal financing needs.

The market did not act alone: this decline in the dollar was mainly orchestrated by Washington.

The United States now faces a dilemma similar to that of Japan. When a country is over-indebted, it has only two options: let its currency weaken or let its bond market suffer. Japan made its choice long ago: the BoJ keeps rates artificially low by buying up debt on a massive scale, at the cost of a sharp depreciation of the yen.

For ten years, the Bank of Japan has kept interest rates artificially close to zero, or even negative, through massive purchases of public debt. This strategy was aimed at preventing a surge in the cost of financing the Japanese government, whose debt now exceeds 250% of GDP, a world record.

But this ongoing support for the bond market has had a direct consequence: the yen has collapsed. As Japanese yields remain artificially low, investors prefer to put their money into currencies offering higher rates, such as the dollar or the euro. As a result, capital is fleeing, demand for the yen is weakening, and the currency has lost more than 50% of its value against the dollar in just 10 years, reaching a low not seen in several decades.

In short, the BoJ has chosen to sacrifice its currency to preserve its bond market. But this choice makes the country vulnerable: the cost of imports is skyrocketing, inflationary pressures are mounting, and international confidence in the yen as a safe haven has been seriously undermined.

The United States is now following the same path as Japan by making a deliberate choice to weaken the dollar. But how are they doing this in practice?

The US Treasury has opted for concentrated issuances of very short-term bills – four, six, or eight weeks. By increasing the number of these auctions, it is draining cash from the money market on a massive scale. But these short-term securities do not offer attractive returns once inflation is taken into account. As a result, investors are favoring other investments – stocks, corporate bonds, or foreign currencies. This reallocation, far from being marginal, is weighing heavily on global flows.

This phenomenon largely explains the surge in US equity markets. Investors, constrained by an environment of saturated short-term rates, are reinjecting their liquidity into the major stock indices. This is fueling the spectacular rally observed on the Nasdaq and the S&P 500, well beyond what economic fundamentals would justify.

This mechanism functions as a form of disguised fiscal QE: by manipulating the structure of its issuances, the Treasury forces capital to leave the money market and flow into risky assets. The rise in US equities is therefore fueled less by an improvement in the economic outlook than by financial engineering skillfully orchestrated between the Treasury and the Fed. This movement automatically contributes to reducing demand for the dollar. By issuing massive amounts of very short-term debt, the Treasury is pushing investors to put their money into maturities of only a few weeks. Once these securities mature, the liquidity is quickly recycled into other, higher-yielding assets such as stocks or corporate bonds. In other words, instead of being “captive” in Treasury bills and therefore in the dollar, global savings are once again flowing into risky markets.

For its part, the Fed has allowed more than $1 trillion to flow out of the Reverse Repo Facility (RRP). Normally, this money would have remained locked up in this short-term facility. By releasing it and reinjecting it into bank reserves, the Fed is restoring liquidity to the financial system. This operation acts as a disguised monetary easing, which eases financing tensions and further weakens the greenback.

In addition, the Fed is keeping its dollar swap lines with major foreign central banks open. This ensures that European, Japanese, and British banks still have access to dollar financing. This relative abundance is preventing the dollar from rebounding on the global market.

Finally, signals from US officials are reinforcing this dynamic. Debates about a possible debt buyback program or regulatory easing suggest that a new wave of liquidity is on the way. Even without any concrete decisions, this communication is enough to fuel expectations of easing and weigh further on the dollar.

By combining these levers – short-term issuance, loosening of the RRP, swap lines, and strategic communication – Washington is deliberately weakening the dollar. This makes Treasuries more attractive to foreign investors and facilitates their placement, while preventing long-term rates from skyrocketing under the pressure of colossal public debt.

In concrete terms, when a local currency strengthens against the greenback, fewer euros, yen, or yuan are needed to buy the same amount of US securities. Treasuries therefore automatically become cheaper in local currency, which improves the net return on investment.

Take, for example, a European investor who wants to purchase $100 million worth of Treasuries. If the euro appreciates against the dollar, they will spend fewer euros to obtain the same bond exposure. The entry cost decreases and the expected return in euros improves without any change in the bond coupon.

Another advantage lies in currency risk management. Buying Treasuries when the dollar is relatively low is also a bet that it could rise again later. If this appreciation occurs, foreign investors benefit from an additional gain when repatriating their capital, on top of the bond yield.

Finally, there is a more global effect. An overly strong dollar puts considerable pressure on emerging countries that have to repay their dollar-denominated debts. This can create financial tensions and weaken the global system. By allowing the dollar to weaken, the United States reduces this systemic risk, which reassures foreign creditors and encourages them to return to the US market.

In short, the weakening of the dollar acts as a powerful incentive for international investors: it reduces the cost of purchasing Treasuries, increases the potential for net returns, and helps stabilize the global financial environment.

In the short term, this strategy makes everything seem fine: US exporters benefit, foreign debtors breathe easier, and stock markets ride the wave of renewed liquidity. But this is a fragile illusion. The more the currency depreciates, the more foreign creditors' confidence can erode.

This strategy carries a major risk. If large international investors – banks, sovereign wealth funds, or insurers – to believe that the dollar is being deliberately manipulated downward, the credibility of the greenback as a reserve currency will be undermined. And without demand from large international buyers, the very balance of U.S. debt will be threatened.

This is not a theoretical hypothesis: in the 1970s, after the end of Bretton Woods and the abandonment of the dollar's convertibility into gold, confidence in the US currency had already eroded. Oil-producing countries reacted by demanding compensation through a sharp rise in energy prices, and several central banks diversified their reserves away from the dollar.

Today, this scenario of mistrust is no longer just a hypothesis: it is already underway with the gradual de-dollarization of foreign exchange reserves in favor of gold. Several central banks – particularly in Asia, the Middle East, and Latin America – have reduced the share of the dollar in their reserves to massively increase their purchases of gold. This shift reflects an implicit loss of confidence in the stability and neutrality of the greenback. If the United States appears too dependent on artificially lowering the dollar to manage its debt, this diversification movement could accelerate. And history shows that once monetary credibility is undermined, it takes a long time to restore.