Latest statistical data shows that the premium long enjoyed by the US dollar exchange rate in currency derivatives markets has almost disappeared. This indicator, which has exceeded Wall Street analysts' long-term expectations, suggests that foreign investors' demand for US Treasuries is continuously weakening, highlighting the strengthening market narrative of "selling US debt" under fiscal budget and tariff uncertainties.

After Trump's return to the White House, his aggressive global tariff policies and the "Make America Great" bill that will significantly increase budget deficits have led to the collapse of so-called "American exceptionalism." Combined with Trump's statements repeatedly threatening Federal Reserve monetary policy independence and the spillover effects from sharply rising Japanese long-term bond yields, this has ultimately triggered continued volatility in US Treasury and dollar markets. This has prompted overseas investors' demand to continuously weaken, with international investors demanding higher compensation for US long-term Treasury yields - which explains why the so-called "term premium" indicator has been heating up recently.

**Dollar Premium Disappearing in FX Derivatives Markets**

According to Bloomberg Intelligence's currency derivatives market statistics, the weighted average three-month basis of the dollar against five major global currencies - reflecting the premium or discount investors accept when borrowing between different major global currencies like the dollar and euro - has fallen dramatically to just slightly below 3 basis points. Undoubtedly, this indicator is moving toward negative territory for the first time since August 2020.

For decades, dollars accumulated by countries with trade surpluses with the US have often been invested in the US Treasury market, so long-term demand for currency-hedged bond positions has helped maintain the dollar premium. However, data compiled by Bloomberg shows that the proportion of US Treasuries held by foreign investors has fallen sharply from a peak of 52% in 2012 to 33%.

Moreover, concerns surrounding the US government's increasingly massive fiscal policies and tariff policies led by President Trump have caused the narrative logic of "selling US assets" and "collapse of American exceptionalism," along with related trading logic, to fully emerge in some trading areas of financial markets in recent months.

Naokazu Koshimizu, senior rates strategist at Nomura Securities in Tokyo, stated in a media interview: "Foreign investors' demand for long-term US Treasuries has continued to weaken, which may be a key factor in the dollar premium's near disappearance." He noted that persistently high funding costs before the recent decline trend have significantly reduced market appetite for dollar assets, while "US policy uncertainty related to tariffs and tax policies may have prompted further diversification of funds away from dollar assets."

**Dollar Assets May Enter Downward Trajectory, Emerging Markets Rise Comprehensively?**

Although US Treasury Department statistics show that global investors' US debt holdings in June remained near historical highs, as "term premium" remains elevated and so-called "American exceptionalism" gradually collapses, foreign investors are increasingly seeking to park their US market funds in other financial markets, especially China-led emerging markets. Therefore, their share in the entire US debt and US financial markets is declining.

With the passage of the deficit-increasing "Make America Great" bill, US Treasury yields across all maturities may continue to surge in 2025, especially longer-term Treasury yields (10 years and above), which may continue to break through multiple historical high points over decades driven by "term premium."

Term premium refers to the additional Treasury yield compensation investors require for holding long-term bond risk. In some economists' view, national debt and budget deficits in the Trump 2.0 era will be much higher than official forecasts, mainly because the new administration led by Trump focuses on an economic growth and protectionist framework of "domestic tax cuts + external tariff increases," combined with increasingly massive budget deficits, US debt interest, and military defense spending. The US Treasury's debt issuance scale may be forced to expand even more than the free-spending Biden administration during the "Trump 2.0 era." Additionally, under "de-globalization," China and Japan may significantly reduce their US debt holdings, and the spillover effects from continued selling pressure on Japanese long-term government bonds will inevitably make "term premium" higher than previous data.

Hidehiro Joke, senior analyst at Mizuho Securities, stated that another factor that may reduce dollar premium is the relative differences in capital liquidity between major global economies and weakened Fed rate cut expectations narrowing yield gaps between economies. If global central banks outside the US reduce their balance sheets - especially reducing US debt holdings - this will further erode US debt liquidity in financial markets and may lead to continued increases in non-dollar currency premiums. Any changes and dynamics in Fed rate cut expectations may make dollar premium more "thin" or turn from positive to negative.

Jeffrey Gundlach, CEO of global asset management giant DoubleLine Capital, known as the "new bond king," recently stated that as Trump's series of radical policies cause "American exceptionalism" to gradually collapse and the Trump administration begins to erode Fed monetary policy independence, the dollar entering a long-term depreciation curve is almost a foregone conclusion. He expects international stocks represented by emerging markets to continue outperforming US stocks.

Not only does the "new bond king" favor emerging markets, but an increasing number of Wall Street investment institutions are optimistic about emerging markets' future trends, including Morgan Stanley, JPMorgan Chase, and Goldman Sachs, all of which favor emerging market upward momentum under dollar weakness and Fed rate cut cycles.

Asset management giants including Fidelity International, T. Rowe Price, and Ninety One Plc stated that factors including further Fed monetary policy easing, foreign investor withdrawal due to Trump administration policies, emerging markets reducing US investment, and adopting more prudent fiscal policies will drive emerging market asset returns far exceeding those of developed market assets like the US.

Since this year, Trump's global tariff policies and immigration restriction measures, along with the introduction of the "Make America Great" bill that significantly increases budget deficits, have led to the gradual collapse of "American exceptionalism." This has prompted some international investors and even some Wall Street asset management institutions to continuously sell US assets since this year, turning instead to emerging markets like China.

European asset management giant Amundi SA has completely shifted from its long-standing "focus on US asset allocation" to betting on European and emerging market value trends, preparing for potential new rounds of severe volatility in US stock, bond, and currency markets that may be triggered by the White House's more aggressive "Make America Great" tax policies and global trade policies.