U.S. short-term rates are still higher than nearly all major economies. Our 4-week Treasury bill is yielding 4.30%, compared to roughly 4.10% in the U.K., 2.66% in Canada, 1.78% in Germany, and just 0.45% in Japan. That spread pulls capital toward the U.S. dollar, supporting the Dollar Index (DXY), which closed last week at 98.04.
President Trump has been vocal in pushing Jerome Powell to cut rates, arguing that keeping them “too high for too long” risks slowing the economy. In truth, the Fed probably needs to cut — inflation has been easing in recent CPI reports, and rates this high do conflict with the Fed’s full employment mandate. But Powell has a political problem: moving now risks looking like the White House is calling the shots. That’s not how the Fed wants to be seen.
When the Fed finally moves, it’s rarely a one-off — historically, rate changes come in clusters of five to six moves in the same direction. Once cuts begin, the U.S. yield advantage will narrow quickly. That’s bearish for the DXY, especially when other central banks have already started cutting.
A weaker DXY would also complement the White House’s goal of narrowing trade deficits — not as a replacement for tariffs, but as another tool alongside them. Tariffs can make imports more expensive, while a softer dollar makes U.S. exports more competitive. Whether or not it’s stated publicly, don’t be surprised if this becomes an unspoken objective of current policy.
Rate cuts also reduce interest costs on the national debt, and with a new fiscal year starting October 1, that matters. But here’s the bind:
- The U.S. debt just hit $37 trillion on August 8 — the fastest $1 trillion increase in history (only 8 months).
- Mandatory spending like Social Security and Medicare is still climbing.
- Foreign participation in U.S. bond auctions is already declining.
Issuing more debt at lower yields makes Treasuries less attractive to private investors. That leaves the Federal Reserve as buyer of last resort — mopping up the excess supply to keep rates from spiking and undoing their own cuts. This is balance sheet expansion, pure and simple — which means more dollars in circulation and less purchasing power in your wallet.
Here’s the double hit to the dollar:
- DXY weakness — the dollar loses value compared to other currencies as the yield gap closes.
- Purchasing power weakness — the dollar buys less at home because money supply growth fuels inflation.
Both tend to be bullish for gold.
Once the Fed starts cutting, it won’t stop after one or two moves. The debt keeps growing, the Fed will be forced to absorb more of it, and the dollar will weaken both abroad and at home. That’s rocket fuel for gold prices — and the time to position yourself is before ignition.
