The greenback is bleeding.
Policy makers call it a correction. Markets call it a crisis. The US dollar is currently navigating a treacherous path as the Federal Reserve balances on the edge of a policy pivot. During the recent Goldman Sachs Global Macro Conference APAC, Rob Kaplan, the firm’s vice chairman, questioned the long-term viability of a weaker currency. He challenged the traditional wisdom that a soft dollar is a panacea for export growth. The reality is far more complex. A depreciating currency acts as a double-edged sword that can slash through the fabric of domestic price stability while offering only a fleeting advantage to manufacturers.
The mechanics of this devaluation are rooted in the narrowing interest rate differentials between the United States and its G7 peers. As the Fed signals a potential pause or reversal in its tightening cycle, the yield advantage that previously anchored global capital in Treasuries is evaporating. This shift triggers a fundamental repricing of risk. Investors are no longer willing to pay the ‘exorbitant privilege’ premium for a currency that is losing its carry trade appeal. The result is a steady slide in the DXY index, which has shed significant value since the start of the year.
The Japanese Volatility Engine
Tokyo is no longer a silent partner in global finance. Recent spikes in Japanese rate volatility have sent shockwaves through the APAC region and beyond. For decades, the Yen was the ultimate funding currency for the global carry trade. Investors borrowed cheaply in Yen to chase higher yields in USD-denominated assets. That trade is now imploding. As the Bank of Japan edges toward a more hawkish stance, the cost of servicing those Yen-denominated debts is rising. This forces a rapid liquidation of dollar assets to cover margin calls, creating a feedback loop of dollar selling and Yen buying.
This volatility is not just a localized issue. It represents a systemic shift in how liquidity flows through the global financial system. When the world’s largest creditor nation begins to repatriate capital, the vacuum left behind is felt most acutely in the US bond market. Per recent Bloomberg currency data, the USD/JPY pair has seen its highest levels of intraday variance in three years. This instability makes it nearly impossible for multinational corporations to hedge their currency exposure effectively, leading to a paralysis in capital expenditure across the Pacific Rim.
Major Currency Performance vs USD (YTD % Change as of Feb 9, 2026)
The Export Illusion
A weak dollar is supposed to make American goods cheaper abroad. This is the textbook theory that politicians love to cite. However, the theory ignores the reality of modern supply chains. Most US exports rely on imported raw materials and intermediate components. When the dollar falls, the cost of these inputs rises. This ‘imported inflation’ eats into the profit margins of the very exporters the policy was intended to help. Kaplan’s warning at the Goldman Sachs conference highlights this exact friction. The short-term boost in sales volume is often offset by a long-term erosion of corporate earnings quality.
Furthermore, the global demand for US goods is not solely price-dependent. In high-tech and aerospace sectors, demand is relatively inelastic. A 5 percent drop in the dollar does not suddenly make a Boeing jet or a specialized semiconductor twice as attractive. It simply reduces the purchasing power of the American consumer who now has to pay more for imported electronics, clothing, and energy. This trade-off is increasingly looking like a losing bargain for the broader US economy.
Kaplan’s Warning and the APAC Reality
The Goldman Sachs Global Macro Conference APAC served as a platform for a much-needed reality check. The consensus among institutional players is that the US cannot simply devalue its way to prosperity. The implications for US monetary policy are profound. If the Fed continues to ignore the inflationary pressures of a weak currency, it risks unanchoring inflation expectations. According to Reuters market analysis, the market is currently pricing in a high probability of ‘sticky’ inflation precisely because of the dollar’s recent weakness.
In the APAC region, the dollar’s decline is being viewed with a mixture of relief and anxiety. Emerging markets with high levels of dollar-denominated debt are seeing their servicing costs fall. Yet, these same nations are struggling with the volatility that Kaplan described. Rapid currency fluctuations disrupt trade agreements and make long-term planning impossible. The stability of the dollar is the bedrock of global trade. When that bedrock starts to crumble, the entire structure of international commerce begins to lean.
| Currency Pair | Current Rate (Feb 9) | 30-Day Change | Volatility Index (VIX-Equivalent) |
|---|---|---|---|
| USD/JPY | 142.20 | -3.1% | 18.2 |
| EUR/USD | 1.0950 | +1.2% | 9.8 |
| GBP/USD | 1.2780 | +0.8% | 11.4 |
| AUD/USD | 0.6540 | -0.5% | 14.1 |
The Liquidity Trap
We are entering a phase where traditional monetary tools are losing their efficacy. The Fed’s balance sheet remains bloated, and the fiscal deficit continues to expand at an unsustainable rate. In this environment, a weaker dollar is not a policy choice but a market consequence. The ‘short-term export gains’ mentioned by Kaplan are a distraction from the structural issues facing the US economy. The real concern should be the potential for a disorderly exit from dollar assets by foreign central banks.
If the dollar loses its status as the world’s premier safe haven, the cost of funding the US deficit will skyrocket. We are already seeing signs of this in the recent Treasury auctions, where ‘indirect bidders’ (mostly foreign central banks) have shown waning enthusiasm. The market is testing the Fed’s resolve. Every tick lower in the DXY index is a challenge to the narrative that the US economy remains the ‘cleanest shirt in the dirty laundry’ of global finance.
The focus now shifts to the upcoming US inflation data. If the numbers show that the weak dollar is finally feeding into consumer prices, the Fed will be forced into a corner. They will have to choose between supporting the currency with higher rates or allowing the economy to slide into a stagflationary spiral. The window for a ‘soft landing’ is closing rapidly. Markets are no longer looking at what the Fed says; they are looking at what the dollar does. The next critical data point for the market to digest will be the US Consumer Price Index (CPI) release on February 13, which will provide the first definitive look at how the dollar’s recent slide is impacting domestic inflation.
