The turning point that led to the end of the so-called "debasement trade" can, in hindsight, be traced back to January 30th.
On that day, U.S. President Donald Trump nominated Kevin Wash to serve as Chair of the Federal Reserve. This decision prompted investors to reassess a popular macro trading strategy at the time—hedging against dollar depreciation by selling the U.S. currency and allocating funds to other assets. On that day, gold fell as much as 13% from its record high, marking its largest drop in over forty years; Bitcoin subsequently also experienced a significant decline. After a prolonged period of weakness, the U.S. dollar gradually found a bottom and stabilized.
While Wash gained Trump's favor due to his advocacy for lower interest rates, many investors focused more on his past reputation as a "hawkish inflation fighter." This background raised questions in the market about his future policy stance and prompted some investors to adjust their positions following his nomination.
Last week, this trend intensified further. In his first monetary policy meeting as Fed Chair, Wash stated that maintaining price stability would be his top priority. For many traders, this statement largely alleviated prior concerns about whether he would simply cater to the White House's preference for pushing interest rates lower. Consequently, the "debasement trade" took another hit.
Gavyn Davies, co-founder and chairman of Fulcrum Asset Management and former chief economist at Goldman Sachs, said, "Anyone who thought he was just put in there to cut rates regardless of inflation is going to be very, very disappointed with Kevin Wash. That is not the kind of Fed Chair he is."
Broadly speaking, the "debasement trade" refers to going long assets like gold and Bitcoin while avoiding currencies such as the U.S. dollar that may face depreciation risks due to inflation or fiscal factors. This trading narrative has been one of the most significant in global markets over the past two years. In the United States, surging government debt and inflation running above target for more than five years have fueled concerns about a sustained decline in the dollar's purchasing power.
Jonathan Owen, a portfolio manager at TwentyFour Asset Management, stated, "The real concerns for investors were the inflation target, the Fed's credibility, and its independence. I think those concerns have largely dissipated now."
Currently, traders have fully priced in expectations for two cumulative interest rate hikes by the end of the first quarter of 2027, whereas before last week's policy meeting, the market anticipated only one hike. The market even believes the first hike could come as soon as the next meeting in July. The policy signals from Wash have further propelled a rebound in the U.S. dollar and boosted longer-dated U.S. Treasuries, which are more sensitive to inflation; meanwhile, gold and cryptocurrencies have come under pressure.
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