Since Donald Trump's return to the White House, many benchmarks have been turned upside down, politically, economically and financially.
In the markets, Donald Trump has in particular "broken" a key correlation: that between Treasuries and the dollar.
In theory, when interest rates rise, bonds offer higher returns, which tends to attract capital and therefore increase demand for currency. In the US case, a rise in Treasury yields therefore leads to a rise in the dollar.
This explains the positive correlation between US 10-year interest rates and the dollar over the long term.
The US 10-year bond (white) and the dollar (blue) have been positively correlated over the long term, but have diverged since the beginning of the year. Source: Bloomberg.
However, since early 2025, the relationship between these two assets has reversed, with the correlation now negative. This is because Donald Trump's erratic decisions have created a certain amount of mistrust towards US assets.
Now, the dollar is falling because investors are selling US assets, including Treasuries. And this sell-off is leading to a rise in rates, as there is an inverse relationship between bond prices and interest rates.
As we explained a few weeks ago, the dollar's decline does not mean that its status is being called into question. The dollar remains the benchmark currency, as there is no real alternative.
However, the dollar may continue to fall. That is certainly the bet many investors are making. Short positions on the dollar are currently at their highest level in two years.
Sources: Bloomberg, CFTC
Last week, Morgan Stanley strategists published a note in which they estimated that the dollar would fall by a further 9% by the end of 2025: "We believe that the rate and currency markets are in long-term trends that will continue—leading to a sharp decline in the US dollar and a marked steepening of yield curves—after two years of fluctuations within wide ranges."
