Dollar Strength at Risk as Fiscal Risks Mount

The US dollar's recent strength may be short-lived due to growing fiscal risks and softer economic data, according to currency strategists. Despite higher U.S. bond yields attracting more capital inflows into dollar assets, investors are becoming increasingly cautious about the dollar's prospects.

Charu Chanana, chief investment strategist at Saxo, notes that higher Treasury yields do not necessarily support the dollar if investors believe the increase reflects fiscal risk, heavier government borrowing or persistent inflation rather than stronger U.S. growth or tighter Fed policy.

The historic relationship between Treasury yields and dollar strength still matters, but investors should increasingly ask why US yields are rising, Chanana said. If the relationship breaks down, it could herald broader portfolio consequences for international investors who have benefited from strong underlying returns and a strong dollar.