UniCredit: Fed-Treasury Tension Could Become a Medium-Term USD Headwind - FJElite

Warsh’s Jackson Hole message that “the Fed has work to do” pushed markets to reprice a more hawkish path, with a rate hike by December now fully priced and the dollar recovering modestly. But that creates a potential conflict with the Treasury, which is trying to lower borrowing costs and flatten the long end of the curve as the deficit approaches 6.3% of GDP and public debt exceeds $40 trillion. The Treasury’s planned buybacks of long-dated bonds, funded through greater short-term bill issuance, could become harder to manage if the Fed is hiking at the same time.

The immediate dollar reaction has been positive because markets corrected overly dovish expectations, but further upside may be limited unless US data surprise strongly or the Fed turns even more hawkish. Over the medium term, a visible clash between monetary tightening and Treasury efforts to suppress long-term yields could revive “sell America” and de-dollarisation trades, supporting alternatives such as gold, silver, real assets and, at the extreme, cryptocurrencies.