Dollar Drops 10% as Markets Reject US Policies

The dollar’s decline and gold’s rise this year indicate that financial markets are displeased with the current administration’s policies, according to a former IMF official. Unless there is a significant policy shift, the U.S. may face a financial crisis leading up to the congressional midterm elections next year.

The world's confidence in the dollar is waning, and the U.S. could experience a financial crisis next year, according to Desmond Lachman, a former deputy director of the International Monetary Fund’s Policy Development and Review Department. He noted that the U.S. fiscal situation was already precarious before the current administration began its second term. Tax cuts and tariffs have added trillions to the deficit and weakened confidence in the dollar by fueling inflation concerns. Additionally, the administration’s disregard for the rule of law has further eroded market trust in the U.S.

Lachman explained that the dollar’s 10% drop against other top global currencies in the first half of the year, despite tariffs and higher U.S. interest rates, is a clear sign of market disapproval. Gold’s surge of over 25% this year and elevated Treasury yields also indicate collapsing market confidence in the U.S. This lack of confidence suggests that financial markets are voting against the current administration’s economic policies.

Lachman warned that markets cannot be pressured or manipulated like politicians. If the administration ignores investors’ warnings, the U.S. could face a dollar and bond-market crisis before next year’s midterm elections. He believes that the era of the world allowing the U.S. to live beyond its means is coming to an end.

While many on Wall Street have expressed concerns about tariffs, inflation, deficits, debt, the dollar, and demand for U.S. Treasuries, these issues have not yet materialized into a crisis. Tariffs have not triggered a spike in inflation, and revenue from duties is on track to reach significant levels this year. Additionally, there remains healthy demand for U.S. debt, and many analysts believe the dollar will retain its status as the world’s primary reserve currency.

John Queen, a fixed income portfolio manager, noted that bond markets are adapting to higher debt levels and that the interest rate market is efficient at pricing in risks. While he is concerned about the size of the debt and its impact on borrowing costs, it is unclear when these worries will become reality. Many have predicted economic catastrophes, but these predictions have not yet come to pass. Queen believes that the market is good at pricing in concerns, but it is difficult to predict when these concerns will materialize.