Weak Dollar and Treasury Bond Buybacks Push Money Into Emerging Markets While Gold Holds Near $4,500

Money is moving out of the dollar and into everything else. Gold, emerging-market bonds, emerging-market currencies. Even Bitcoin is catching a bid, according to a Ground News aggregation of coverage on the so-called 'debasement trade.'

The trigger, according to CNBC, was Treasury Secretary Scott Bessent's decision last month to double planned buybacks of longer-dated U.S. government debt. The goal was to ease pressure on long-term yields, which had surged on inflation and debt worries. The move also weakened the dollar.

The U.S. Dollar Index stood at 99.12 as of September 5, according to Crypto Briefing. That's soft. Meanwhile the 10-year Treasury yield sits at 4.79% and the 30-year at 5.27%, per the same report. Those numbers are not low by recent standards. If the buyback plan was meant to crush yields, it hasn't fully done that yet.

Gold's Wild Ride

Gold hit $4,644 an ounce on August 24, its highest level since May 18, according to the Epoch Times. That was up more than 17% from a July 17 low of $3,959. The August spike tracked rising Iran tensions, with Mohsen Rezaee, secretary of Iran's Supreme National Security Council, threatening to block oil shipments through the Strait of Hormuz if Tehran faced new economic isolation.

Investors were also bracing for Fed Chairman Kevin Warsh's speech at the Jackson Hole symposium in late August. Peter Schiff, chief economist at Euro Pacific Asset Management, argued on X that gold's 15% run in three weeks 'doesn't happen with a hawkish Fed determined to do whatever it takes to lower inflation.' He said it happens 'when investors realize the Fed is bluffing.'

ING commodities strategist Ewa Manthey took a more cautious view, telling clients the gold rally is 'unlikely to be straightforward' if the Fed leans hawkish and yields stay elevated. ING's own forecast pegs fourth-quarter gold at an average of $4,150 an ounce, assuming restrictive Fed policy holds.

Gold has since cooled to roughly $4,477 by September 5, per Crypto Briefing, well off its August peak but still far above summer lows.

The Wall of Money

Robin Brooks, a senior fellow at the Brookings Institution, said emerging markets are set for 'a wall of money' as developed economies try to cap long-dated yields, according to CNBC. He argued the U.S. government's own bond-buying reduces the classic risk of carry trades: a sudden spike in borrowing costs.

Global emerging-market bond funds took in $967 million in the week through Wednesday, up about 15% from the prior week, according to TD Securities data cited by CNBC. Since Bessent's buyback announcement, the South Korean won has gained 2.83% against the dollar, the Brazilian real 0.64%, and the South African rand 0.59%, per LSEG data.

Peter Kinsella, global head of FX strategy at Union Bancaire Privée, told CNBC the Treasury's move signaled policy 'akin to financial repression,' weakening the dollar and lifting high-yield currencies. He named Brazil and Turkey as favorites given their steep real interest rates: Brazil's benchmark rate is 14% against 4.2% inflation as of mid-August, while Turkey's repo rate sits at 37% against 31.75% inflation.

Colombia has been the standout. Its peso is up roughly 20% year-to-date and the COLCAP stock index has matched that gain, according to Wee Khoon Chong, macro strategist for Asia Pacific at BNY, speaking to CNBC. Asian currencies broadly are expected to lag their emerging-market peers, CNBC reported.

Fund managers at JPMorgan Asset Management, Invesco, and Marlborough Investment Management credit emerging-market central banks with tighter inflation discipline and better fiscal management than the U.S., according to reporting aggregated by Ground News. That's the argument driving the flows.

The Fed Wildcard

Fed Governor Christopher Waller said he'd support holding rates steady if inflation keeps moderating, according to a report from directorstalkinterviews. That comment mattered: swap markets pricing the Fed's September 16 meeting had shown roughly 70% odds of a rate increase earlier in the week. After Waller's remarks, the odds fell to close to a coin flip.

A near-even chance of a hike, not a cut, is the notable detail. That fits with the domestic economy's split personality described in the Fed's Beige Book and flagged by Breitbart. Manufacturing, defense, data centers, and energy investment are running hot. The Philadelphia Fed reported a factory surge, the Chicago Fed found gains in metals and autos, and the Dallas Fed saw strength in machinery and computers. Consumer spending, autos, and housing are cooling, and consumers have grown price-conscious, limiting businesses' ability to pass on costs.

Breitbart's read is that this divergence isn't a warning sign but the soft landing working as intended, since the Fed targets consumer inflation (the PCE index) rather than industrial costs. Whether Warsh's Fed agrees enough to hike rates on September 16 is still an open question.

Betting on the Trade

Retail investors have been chasing this move too. The Virtus Stone Harbor Emerging Markets Income Fund (EDF) offers a 13.7% yield with monthly distributions of $0.06 that have held steady since November 2021, according to an analysis published on Seeking Alpha by a contributor who disclosed a long position in the fund. Its net asset value has climbed and it now trades at a 4.8% premium, which the analyst reads as a sign of investor confidence in the strategy, though a closed-end fund trading above NAV can also mean investors are simply paying up for yield.

The risks are real and named by the sources themselves. A reversal in the dollar, a sovereign default, or renewed geopolitical shocks could undo the trade fast, according to the Seeking Alpha analysis. Manthey's ING team already flagged that a hawkish Fed surprise would lift yields and the dollar, hurting gold and emerging markets alike.

The next real data point is the Fed's September 16 decision. Employment figures due before then, per directorstalkinterviews, could revive expectations of a rate hike and reverse the dollar weakness that's fueling this entire trade. Until then, the money keeps flowing toward Brazil, Turkey, Colombia, and gold, betting that Washington's own debt problem is a bigger risk than anything happening in Brasília, Ankara, or Bogotá.