The New York Times reports:

Global investors are balking at U.S. bonds. Talk of the dollar’s dwindling power is getting louder. Foreign governments are hauling their gold out of American vaults.

Almost two years into President Trump’s second term, the world economy is increasingly looking for ways to distance itself from America. Concerns about a $40 trillion debt burden, the excessive use of sanctions to solve foreign policy problems and Mr. Trump’s penchant for pushing the limits of the rule of law are raising questions about the appeal of the United States as a haven for global investment.

Despite pledges by foreign companies and nations to invest in the United States — in many cases to curry favor with the White House — capital is starting to seek alternative destinations.

“Geopolitical factors and U.S. weaponization of the dollar through financial sanctions are causing central banks and other official investors to attempt to diversify away from dollar assets,” said Eswar Prasad, the former head of the International Monetary Fund’s China division.

The United States is not yet an investment pariah. Private investors are still pouring money into American financial markets and stocks, artificial intelligence infrastructure is booming and no rival currency is poised to topple the dollar imminently.

In testimony before Congress on Tuesday, Treasury Secretary Scott Bessent said that he remained confident in the credibility of the U.S. financial system, arguing that bond auctions continue to operate successfully and that the dollar is still thriving as measured by its share of global transactions.

“The U.S. is in fact the leader, and the leader does not fear competition,” Mr. Bessent said. “Competition makes us better.”
But cracks in America’s economic dominance are starting to show.

The most glaring example has been in the bond market. Yields have been soaring as investors nervous about the mounting national debt demand a higher rate of return for buying Treasury bonds. This week, the yield on the 10-year Treasury topped 5 percent, reaching its highest level since 2007.

A decision to raise rates on Wednesday could help to alleviate concerns about the Fed’s grip on elevated inflation, fears that have injected more jitters into bond markets.

The ominous bond threshold was crossed a week after the Treasury Department purchased $5.2 billion of its own debt maturing in the next 10 to 20 years, part of a plan to inject demand into the Treasury market to try to push prices higher and yields lower. Mr. Bessent said investors were failing to understand the underlying strength of the economy and dared them to bet against him.

“It’s my dream,” Mr. Bessent said last week at Southern Methodist University. “I have asymmetric information. I am the house now.”

With the United States’ long-term fiscal situation looking shaky, some countries are starting to wonder if America is a wise investment. This month, Norway’s sovereign wealth fund, the largest in the world, said it planned to reduce its holdings of U.S. Treasuries as it looks elsewhere for stronger returns.

And then there is the future of the dollar. [Continue reading…]