{"id":348532,"date":"2025-09-27T22:05:31","date_gmt":"2025-09-28T03:05:31","guid":{"rendered":"https:\/\/michigandigitalnews.com\/index.php\/2025\/09\/27\/what-exactly-happened-to-the-dollar-around-liberation-day-illiquidity-vs-no-confidence\/"},"modified":"2025-09-27T22:05:31","modified_gmt":"2025-09-28T03:05:31","slug":"what-exactly-happened-to-the-dollar-around-liberation-day-illiquidity-vs-no-confidence","status":"publish","type":"post","link":"https:\/\/michigandigitalnews.com\/index.php\/2025\/09\/27\/what-exactly-happened-to-the-dollar-around-liberation-day-illiquidity-vs-no-confidence\/","title":{"rendered":"What Exactly Happened to the Dollar around \u201cLiberation Day\u201d: Illiquidity vs. No-Confidence"},"content":{"rendered":"

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Some people argue the concurrent dollar decline and Treasury yield incrase was attributable to liquidity issues as repicing occurred against a backdrop of a rising share of price sensitive Treasury holders. Others that it was a flight away from the US dollar assets spurred by tariff uncertainty (see a discussion\u00a0here<\/a>). Here\u2019s the picture people know, the dollar vs. US Treasurys:<\/p>\n

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Figure 1:<\/strong> Nominal dollar against advanced economies currencies (blue, left scale), and 10 year US Treasury yield, % (tan, right scale). Source:\u00a0 Federal Reserve, Treasury, via FRED.<\/em><\/p>\n

And here are two graphs from Helene Rey and Vania Stavrakeva, \u201cInterpreting Turbulent Episodes in International Finance\u201d<\/a>, keynote presented at the Asian Monetary Policy Forum (Singapore, 2025). (My discussion here<\/a>).<\/p>\n

The first is the reaction of the exchange rate to equity flows during the pandemic. The foreign currencies weakened as imputed equity flows moved to the US.<\/p>\n

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Source:<\/strong> Rey, Stravakeva (2025)<\/a>.<\/em><\/p>\n

In contrast, in 2025 around \u201cLiberation Day\u201d, other currencies strengthened as imputed equity flows moved out of the US.<\/p>\n

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Source:<\/strong> Rey, Stravakeva (2025)<\/a>.<\/em><\/p>\n

So, while I don\u2019t discount completely the idea of illiquidity in the Treasury market as a driver of the increase in Treasury yields around \u201cLiberation Day\u201d, it seems to me that at least part of the shift post-\u201cLiberation Day\u201d is due to the decline in the confidence in the dollar. While the correlation in changes in the dollar\u2019s vale and in the Treasury yield have re-asserted itself, it\u2019s interesting that in Figure 1, the gap that widened in the levels has persisted.<\/p>\n

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