Growing uncertainty over U.S. politics and fiscal policy is once again making investors jittery about the dollar. As some market participants dump the greenback, alternative assets such as bitcoin and gold have surged in price. Wall Street calls this the "debasement trade," a phrase rooted in history when rulers like England's King Henry VIII and Roman Emperor Nero diluted gold and silver coins with cheaper metals like copper. Today, it describes investors seeking refuge in other assets out of fear that the dollar will lose value.

Not everyone is convinced this trend is real, and some argue that not every dollar decline warrants alarm. But those who buy into the debasement trade say it is gaining momentum and reflects the growing challenges facing investors in U.S. assets as government debt climbs ever higher.

The latest round of anxiety was triggered by Treasury Secretary Scott Bessent's hands-on moves in financial markets. He first stepped in to support the yen, then announced plans to expand buybacks of select U.S. Treasuries to push down long-term borrowing costs. Both actions sent the dollar lower.

What is the debasement trade?

The debasement trade is a strategy investors use to shield themselves from the erosion of a currency or other assets. It involves selling currencies or securities vulnerable to political or fiscal shocks and rotating into safe havens like gold. But it is not simply about playing it safe. Investors are also piling into cryptocurrencies, which, despite their wild price swings, are relatively insulated from monetary and fiscal policy.

Proponents argue the debasement trade has picked up steam in 2025, as President Donald Trump's tariffs cast a shadow over the economic outlook and the threat of a government shutdown stokes fresh worries about fiscal deficits. Last year, the dollar posted its worst annual performance since 2017, sliding nearly 10%. Gold, by contrast, jumped 65%. The greenback then rebounded early this year as investors welcomed the selection of Kevin Warsh as Federal Reserve chair and were encouraged by his pledge to prioritize price stability. The possibility of rate hikes typically lends support to a currency.

Why is the debasement trade back in the spotlight?

Despite Bessent's insistence that the U.S. remains committed to a "strong dollar" policy, two of his actions have reignited concerns about currency depreciation. First, Washington intervened in foreign exchange markets for the first time in nearly three decades to help Japan prop up the yen, though it sold euros rather than dollars. Some market observers believe this move lowers the risk that Japan would have to dump U.S. Treasuries to raise dollars for its currency support.

Second, with 30-year Treasury yields climbing due to war-related inflation worries and persistent fiscal concerns, the Treasury Department announced it would at least double the size of its buyback operations for 10- to 30-year bonds. George Saravelos of Deutsche Bank wrote in a client note that if Treasury prices are "not allowed to adjust lower," then the currency value of foreign investors' holdings must adjust through a weaker dollar. Robin Brooks, a senior fellow at the Brookings Institution, went further, saying the Treasury is "playing with fire." He warned that trying to cap long-term yields without addressing the country's fundamental fiscal imbalances could shift pressure from the bond market to the exchange rate. The outcome, he cautioned, may not be a debt crisis but a currency crisis, citing Japan's recent experience of a chronically weak yen as a warning.

Adding to the mix, speculation is growing that the Fed under Warsh may not raise rates as aggressively as previously expected, prompting investors to turn bearish on the dollar into the second half of 2026.

Why are investors broadly worried about the dollar?

The U.S. borrowed heavily during the worst of the pandemic to stave off a recession. As vast sums of money flooded the economy, demand for goods and services climbed, pushing up inflation in many cases. The Fed then hiked rates sharply to cool demand and tame price growth. Those measures largely worked, but the high-rate environment made servicing the nation's massive and growing debt more expensive. With Washington needing more funds to cover interest payments, politicians have less fiscal firepower to stimulate the economy. The government may also be forced to cut other spending to service debt, further weighing on growth and pressuring the dollar. U.S. national debt now exceeds $40 trillion. If markets conclude that government borrowing is becoming increasingly unsustainable, that could drag on growth and weaken the currency. Billionaire investor Ray Dalio urged clients in August to trim bond exposure and hold gold and some bitcoin as a hedge against a potential U.S. debt crisis.

There is also a nagging suspicion in some corners that, despite public denials from Trump and Bessent, they may not actually be averse to a weaker dollar.

What makes gold attractive?

Gold is sometimes viewed as the classic "safe haven" asset, retaining its value even in turbulent times. Investors favor it because its supply and price are not directly controlled by governments or central banks, making it less vulnerable to policy or fiscal decisions. Over the short term, gold is not a perfect inflation hedge. But many still regard it as one of the few highly liquid assets likely to preserve value over the long haul, since its supply is constrained by geology rather than politics. Gold is also typically priced in dollars, so when the dollar falls, gold prices almost always rise, partly because a weaker dollar makes bullion cheaper for buyers using other currencies. That makes gold an obvious choice for investors betting on dollar weakness.

Central banks are also underpinning demand by steadily adding to their reserves. Part of the motivation is guarding against currency "weaponization," especially after the U.S. leveraged the dollar's central role in the global banking system to cripple Russia's access to international funds following its invasion of Ukraine.

What do skeptics of the debasement trade say?

Some investors argue the logic behind the so-called debasement trade is flawed, or that there is little evidence the trend is actually happening. They point out that global investors still hold large amounts of U.S. Treasuries, suggesting there is no mass exodus from dollar-denominated assets. Critics also downplay the narrative by noting the U.S. stock market remains strong, since foreign investors must buy dollars to purchase U.S. equities.

Brent Donnelly, president of Spectra Markets, initially viewed Bessent's announcement of expanded Treasury buybacks as a signal to buy bitcoin while shorting the dollar against the Swiss franc. But he later reconsidered, given that the buyback size remains small relative to the entire Treasury market.