Occasional Daily Thoughts 6/17/25

By LaRue Gibson on June 17, 2025

Are Central Banks Diversifying Their U.S. Dollar Holdings?

The U.S. Dollar continues to sell off after the announcement of the Trump Administrations’ tariff regime. The U.S. Dollar Index trades below the post-Liberation Day low now. What might cause this?

Several catalysts come to mind:

• The $500 Billion liquidity injection from the Treasury General Account while the debt ceiling impasse continues
• Tariffs
• Section 899 of the proposed tax bill may reduce foreign investment in the U.S.
• Weaker economic data
• Expectations of more Fed rate cuts
• The US deficit.
• Foreign central banks are not buying Treasuries

Much of this is short-term and will fluctuate, but the final catalyst raises the most concern.

 Foreign central banks hold nearly $3 Trillion of Treasuries in custody at the Federal Reserve, primarily as a currency management tool. As such, when the dollar weakens, they will often buy Treasuries to prevent excessive swings in their own currencies, and vice versa. But despite dollar weakness since April 2nd, foreign central banks have continued to sell Treasuries, raising the possibility that some of the dollar weakness is related to central banks diversifying their reserve assets away from dollars. This would be a massive trend-change if it persists, as it would be a concrete sign pointing towards de-dollarization.

We offer a few points to consider:

1. The U.S. Dollar has returned to levels prior to the COVID pandemic era when the dollar rose significantly,
2. The U.S. Dollar levels are consistent with the range established between 2-15 and 2020.

With Treasury market supply/demand dynamics looking increasingly precarious, who will provide the marginal bid for Treasuries going forward? For now, foreign buyers have not filled that role, with rising yields globally making Treasuries relatively less attractive.

Finally, and perhaps importantly, gold now moves with U.S. trade policy and U.S. fiscal spending at the same time. The tariff regime is a recent phenomenon and bears watching as a debt reducing force. However, deficit spending’s trajectory persists, and the interest on the national debt amounts to 18% of the budget. With interest rates on the rise and fiscal discipline in short supply, this trend appears to be headed higher. Revenue to the treasury may determine the secular trend for gold. Stay tuned.

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