The recent sell-off in U.S. Treasuries has been exacerbated by foreign central banks offloading their holdings at a pace not seen since the 2023 banking crisis. This move is largely driven by a need to defend their currencies, which are under pressure, by reallocating reserves into non-USD assets. The Bloomberg Dollar Spot Index's significant rise in the fourth quarter of 2024 has further incentivized these central banks to rebalance their portfolios, selling Treasuries to purchase domestic or other non-USD assets. This shift is compounded by growing uncertainty surrounding U.S. policies and the Federal Reserve's monetary strategy, which has increased volatility and made Treasuries less attractive.
The U.S. dollar's diminishing role in global reserves, dropping below 58% in Q3 2024 for the first time since 1995, underscores the trend of diversification away from USD-denominated assets. Should this trend continue, it could lead to broader market reactions, with investors viewing the ongoing sell-off as an opportunity for increased bond market activity, potentially heightening yield volatility.
As of 02:00 on January 14, the U.S. Dollar Index (DXY) stands at 109.58, slightly down from its last close of 109.96, just shy of its 52-week high of 109.97. This reflects the complex interplay of central bank actions and market dynamics currently influencing the currency and bond markets.