Is The US Dollar Debasement Trade Back in Earnest?

A number of experts advise that the “Debasement Trade”* is back as investors unload the US dollar, due to fiscal and political uncertainty and piling into alternative assets such as gold and Bitcoin, with the cryptocurrency hitting a three month high and passing the $80,000 mark. However, a number of other experts suggest that the debasement trend is not real, and just because there has been a dip in the dollar, there is no need to expound on the debasement theory. 

*Debasement Trade – A financial strategy where investors invest in assets such as Bitcoin and gold as a hedge against the devaluation of fiat currencies, with key takeaways being rising sovereign or government debt, geopolitical instability, and inflation.

Currency commentators suggest that the reason for the latest fall in the US dollar started with interventions in the currency markets to support the Japanese Yen, as instigated by the US Treasury Secretary Scott Bessent. Scott Bessent then tried, unsuccessfully, to rein in long-term borrowing costs by announcing further plans to buy back long-term government bonds and issue shorter term treasuries. These two steps taken by the Treasury Secretary have revived talks of debasement, despite the fact that he maintains that the White House through the Treasury still has a strong US dollar policy.

However, government debt has now gone roaring past the $40 trillion mark, and with yields on treasuries elevated, the sustainability of such debt is becoming harder with analysts suggesting that this will weigh on growth and devalue the US dollar. Some well-known experts have encouraged investors to sell the dollar and buy gold and Bitcoin, driven by market speculation (despite claims to the contrary) that both the President and the Treasury Secretary are comfortable with a weaker dollar.

One problem for the White House is that come November, the upcoming mid-term elections are just around the corner, and with mortgage rates still rising and gasoline prices still high at the pumps, commentators suggest that the bond buy-backs, hopefully lowering long-term yields, may well be politically motivated. The problem, suggest some analysts, is that by pushing this programme too hard it may reignite inflation, forcing the Federal Reserve to hike interest rates, which is exactly what the White House does not want. 

On the flip side of the debasement argument, some analysts point out that the debasement trade is flawed and there is not enough evidence to support this theory. Indeed, they note that there is no global selling of US dollar denominated assets as global investors continue to hold sizable amounts of US Treasuries. They also note the current strength of the US stock market as a nod to their anti-debasement theories, as overseas investors need to purchase dollars in order to buy US stocks and shares. 

However, looking forward, many experts agree that enthusiasm for the debasement trade may prove to be short-lived. The recent moves within the gold, Bitcoin and the US dollar markets may start to substantially cool as no one can see where the next catalyst for these moves will be coming from. Analysts point out that the buy-back schemes initiated by Secretary Bessent are on the small side in relation to the Treasury market itself. On the cryptocurrency front, Spot Bitcoin ETFs (Exchange Traded Funds) have recently had their strongest inflow for ten months, but will this continue if the debasement debate goes away?