The dollar is bleeding
Central banks are watching. The trade-off is a trap. Policy makers often view a depreciating currency as a panacea for stagnant trade balances. They are wrong. While a weaker dollar theoretically makes American exports cheaper, the structural reality of 2026 suggests a far more corrosive outcome. Rob Kaplan, Vice Chairman at Goldman Sachs, recently signaled this shift at the Global Macro Conference APAC. He questioned whether short term export gains justify the long term erosion of purchasing power. The answer lies in the mechanics of global supply chains. Most US manufacturing inputs are now priced in a basket of currencies that are currently outperforming the greenback. This creates a feedback loop where the cost of production rises faster than the competitive advantage gained from a lower price tag on the finished good.
The Japanese Carry Trade Collapse
Volatility is the new baseline. The Bank of Japan has finally abandoned its decade-long flirtation with yield curve control. This pivot has sent shockwaves through the currency markets. For years, investors borrowed yen at near-zero rates to fund high-yield bets in US Treasuries. That trade is dead. As Japanese rates climb, the yen strengthens, forcing a massive liquidation of dollar-denominated assets. This is not a controlled descent. It is a margin call on a global scale. Per reports from Bloomberg Markets, the yen has appreciated 8 percent against the dollar in the last forty-eight hours alone. This volatility is not merely a Japanese problem. It is a systemic threat to US liquidity. When the world’s largest creditor nation starts calling its capital home, the borrower feels the squeeze.
USD Index Performance (Feb 2026)
Imported Inflation and the J-Curve Effect
The J-curve is failing. Standard economic theory dictates that a weaker currency improves the trade balance after a brief lag. In the current environment, that lag has become an indefinite delay. The US economy is too reliant on imported intermediate goods. When the dollar drops, the cost of these inputs spikes immediately. This is reflected in the latest Reuters currency analysis, which highlights the divergence between nominal export growth and real profit margins. Small and medium enterprises are the first to feel the burn. They lack the sophisticated hedging instruments used by multinationals to navigate these swings. They are forced to pass costs to consumers, fueling an inflationary fire that the Federal Reserve is struggling to extinguish.
| Indicator | Jan 2026 Value | Feb 20, 2026 Value | Change (%) |
|---|---|---|---|
| USD/JPY Exchange Rate | 142.50 | 131.20 | -7.9% |
| US 10-Year Treasury Yield | 4.15% | 3.82% | -7.9% |
| DXY Dollar Index | 103.40 | 99.40 | -3.8% |
| Import Price Index (MoM) | +0.2% | +1.4% | +600% |
The Geopolitical Pivot
Sovereign debt is the silent killer. As the dollar loses its luster, foreign creditors are demanding higher premiums to hold US paper. The Treasury is caught in a pincer movement. On one side, it needs a weaker dollar to stimulate domestic production. On the other, it needs a strong dollar to attract the capital required to fund a ballooning deficit. Kaplan’s address at the Goldman conference emphasized that the outlook for US monetary policy is no longer dictated solely by domestic employment or inflation. It is now a hostage to international capital flows. The volatility in Japanese rates is a harbinger of a broader realignment. The era of the dollar as an undisputed safe haven is being tested by the very institutions that once upheld it.
The focus now shifts to the March 15 Treasury International Capital (TIC) report. Markets are bracing for data that could confirm a massive divestment by Asian central banks. If the net outflow exceeds $150 billion, the current dollar slide will transform into a structural collapse. Watch the 130.00 level on the USD/JPY pair. A breach there signals a total unwinding of the carry trade and a forced revaluation of the entire US yield curve.
