Geopolitical friction is cooling global demand for U.S. Treasuries, forcing a reliance on foreign capital chasing the domestic AI boom. While Treasury holdings historically provided a countercyclical buffer during market downturns, this new funding model ties the dollar’s health directly to the performance of high-growth stocks. Deutsche Bank strategist Mallika Sachdeva noted that this transition makes the currency more leveraged and inherently riskier, stripping away the diversification benefits that once encouraged investors to maintain unhedged dollar positions.
This trend mirrors concerns raised by Reserve Bank of Australia Deputy Governor Andrew Hauser regarding the erosion of America’s "exorbitant privilege," the unique ability to borrow cheaply due to the dollar’s reserve status. With a current account deficit projected at $1.12 trillion for 2025, the U.S. remains heavily dependent on foreign inflows. Despite these long-term structural pressures, the dollar has clawed back half of its 2025 losses, buoyed by safe-haven demand amid the U.S.-Israeli conflict with Iran and expectations of imminent Federal Reserve interest rate hikes.
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