Canadian and US markets fall as rising yields and debt fears shake confidence in greenback
Trade-related uncertainties, ballooning fiscal debt, and diminished confidence in US exceptionalism have led to sustained weakness in US assets, according to reporting from BNN Bloomberg.
On Tuesday, the US dollar has notably declined, driven by a selloff following credit concerns and a change in investor sentiment.
Moody’s recent decision to downgrade the US’s sovereign credit rating by one notch renewed selling pressure on the dollar, undermining a temporary rally spurred by a truce in the US-China trade war.
According to George Vessey, lead FX and macro strategist at Convera, “There’s plenty of room for further depreciation, purely from a valuation perspective.”
He added that the “sell America” trade had re-emerged post-downgrade.
The US dollar index has dropped as much as 10.6 percent from its January highs, nearing the most bearish positioning since July 2023.
CFTC data indicated that speculators held a net short position totalling $17.32bn.
The index, once trading 22 percent above its 20-year average, currently remains about 10 percent above that level, leaving scope for further declines that could reach levels last seen during US President Donald Trump’s first term.
Strategists and investors, long cautious about dollar valuations, are seeing a potential turning point.
Steve Englander, head of global G10 FX research at Standard Chartered, said recent trade developments may ease immediate tensions but fail to address long-term confidence issues.
“The dollar weakness story is not over,” he said.
Analysts noted that Trump’s expansive tax-cut bill could add $3tn to $5tn to the nation’s $36.2tn debt over the next decade.
“The combination of diminished appetite to buy US assets and the rigidity of a US fiscal process that locks in very high deficits is what is making the market very nervous,” said George Saravelos, global head of FX research at Deutsche Bank.
Despite these pressures, White House spokesperson Kush Desai stated, “President Trump has been unequivocally clear about maintaining the strength and power of the US dollar as the world’s reserve currency.”
While US equities and Treasuries remain widely held globally due to past asset appreciation, investors are reconsidering dollar exposure.
Peter Vassallo, FX portfolio manager at BNP Paribas Asset Management, noted the shift. “If the dollar is no longer acting as a safe-haven currency... should we really be holding this much of it?” he said.
Colin Graham, head of multi-asset strategies at Robeco, acknowledged some rebalancing but stated it hadn’t yet resulted in large-scale selling of US assets.
Still, with trillions in foreign holdings, even modest increases in hedge ratios could put downward pressure on the dollar in forward markets.
Asian economies like China, South Korea, Singapore, and Taiwan, holding substantial USD reserves from trade surpluses, could also influence market movements.
In early May, Taiwan’s currency experienced a two-day surge, signalling potential volatility.
Eurizon SLJ Capital’s Stephen Jen and Joana Freire estimated USD holdings of about $2.5tn in the region pose “sharp downside risks” to the dollar.
On Wednesday, Canadian and US equity markets recorded sharp losses as rising Treasury yields triggered a risk-off response.
Canada’s S&P/TSX composite index dropped 216.46 points to 25,839.17—its biggest decline since April 10.
In the US, the Dow Jones fell 816.80 points to 41,860.44, the S&P 500 shed 95.85 points, and the Nasdaq declined 270.07 points.
The market downturn followed a 20-year US Treasury bond auction requiring a yield above five percent to attract $16bn in lending.
Mike Archibald, vice-president and portfolio manager at AGF Investments Inc., remarked, “Through five percent it starts to get a little bit sticky for the equity market.”
He added that persistent budget deficits were contributing to market strain, with higher borrowing costs spilling into consumer and business interest rates.
The rising yields reflect concerns that new tax cuts under consideration could increase debt and inflation.
Archibald noted, “They’re in the midst of trying to negotiate through the House of Representatives their tax bill, which will include some permanent tax cuts.”
While most sectors posted losses, the S&P/TSX saw relative gains in defensive areas including materials, energy, utilities, and consumer staples.
Canadian earnings season is underway, with Toronto-Dominion Bank reporting Thursday, expected to offer insight into domestic economic sentiment.
Archibald said, “We’ll get a pretty good read on what the state of the Canadian economy, and specifically the state of the Canadian consumer.”
The Canadian dollar appreciated to 72.21 cents US from 71.76.
In commodities, July crude fell 46 cents US to US$61.57 per barrel, June natural gas dropped six cents to US$3.37 per mmBTU, June gold gained US$28.90 to US$3,313.50 an ounce, and July copper rose two cents to US$4.67 a pound.
Jack McIntyre, portfolio manager at Brandywine Global, said the dollar’s long-term resilience may falter, adding, “The story is more kind of looking for opportunities to sell dollars on strength right now.”
