Ever since the United States imposed sweeping tariffs on April 2, financial markets have been pricing in higher inflation, rising interest rates and further policy-induced dysfunction at the long end of the Treasury yield curve, all while anticipating accommodative monetary policy at the front end of the curve.
This is a condition that cannot endure for long.
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The past few days have been a case in point, as the 10-year Treasury yield has moved above 4.5% and the 30-year has exceeded 5% in the aftermath of the U.S. credit rating downgrade.
It’s all happening as investors consider the prospect of higher tariffs taking effect on July 9, when the 90-day pause on some of the most extreme trade taxes expires.
Something’s got to give.
That something, in our view, is the U.S. dollar, which looks to depreciate further against its G-10 peers in general and the euro in particular.
The dollar has been on a downward trend since so-called Liberation Day on April 2, and forward-looking metrics suggest that this deterioration will continue.
Now, as the impact of tariffs begins to hit consumers, it would not be surprising if investors push yields higher and the dollar lower.
At the very least, markets are headed for a period of excessive volatility, driven by rising long-term rates, increasing inflation and investor concerns over unfunded tax cuts and government spending.
