Will the US dollar continue to weaken amid economic uncertainties and rising treasury yields? Claudio Irigoyen answers

Synopsis

BofA Global Research's Claudio Irigoyen suggests the US dollar will likely remain soft without a major collapse. Rising US treasury yields reflect recalibrated expectations due to fiscal and policy uncertainties, impacting consumer and business sentiment. Portfolio rebalancing by global investors, shifting away from US assets, further contributes to the dollar's struggle.

The US dollar is expected to remain somewhat soft, but not necessarily experience a sharp disorderly decline, said Claudio Irigoyen, head of global economics research at BofA Global Research. In a conversation with Himadri Buch, New York-based Irigoyen shared his views on the US dollar outlook, treasury yields, the fiscal bill and why India continues to stand out in the emerging markets pack. Edited excerpts:

The US treasury yields have been rising while the US dollar is struggling to stay steady. Is there a crisis of confidence?

What we are witnessing is probably a recalibration of expectations in response to a confluence of fiscal and policy uncertainties. The uncertainty is certainly weighing on consumer and business sentiment, prompting a natural wait-and-watch approach among companies, particularly about investment decisions. However, this hesitation, when paired with the broader fiscal gap, is prompting markets to demand a higher risk premium on US assets. That is leading to a sharp rise in treasury yields. At the same time, global investors, who had been heavily overweight on US assets and underweight on European assets, have begun rebalancing their portfolios.

This is contributing to the US dollar’s relative weakness against the euro and other currencies. I expect the US dollar to remain somewhat soft, but not necessarily experience a sharp disorderly decline. However, this should not be misconstrued as a threat to the US dollar’s reserve currency status.

Do you see money moving out of the US on account of the dollar weakening? Which are the regions that could benefit?
The global investor base had become significantly overweight on US assets, so some moderation was to be expected. Consumption in the US is slowing but not to a degree that signals recession. While the US outlook has softened, it remains more compelling than much of Europe, where structural challenges persist and growth remains tepid. Among emerging markets, there are bright spots. India stands out as a resilient story, benefiting from structural reforms, demographic momentum and robust domestic demand. A few others may attract flows on a relative basis, but we should be realistic — when global growth slows, as we now expect it to, very few markets are immune. In a world, where US and China, the twin engines of global demand, are slowing, capital may rotate selectively, but broad decoupling is unlikely.

How are investors looking at India?

Global investors continue to view India as one of the more compelling narratives in an otherwise challenging global environment. While growth expectations have moderated slightly, we still expect India’s GDP to expand 6.3% in 2025. Inflation is also trending lower, creating space RBI to cut rates further. Compared to other emerging markets, India’s story remains structurally solid.

Your evaluation of the US tax bill?
The fiscal bill is one of the key concerns for the US economy. While the bill may provide some immediate stimulus, it risks entrenching a structural fiscal imbalance at a particularly fragile juncture. Moreover, the risks are that higher rates on the back of a larger deficit abort any stimulative effect on the economy. Preliminary assessments suggest that the approved bill could validate a primary deficit of around 3.5% of GDP and a headline deficit of 6.9%, which will not be sustainable in the absence of robust revenue growth. The dynamics of fiscal policy are now more critical than ever

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