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The sharp decline in dollar long-term interest rates in the recent period has caused the dollar to depreciate against the euro, the yen and the Chinese renminbi, and driven up the price of gold. This shows that although the dollar is the dominant reserve currency, demand for dollars falls when dollar long-term interest rates decline, as per Natixis.

Key quotes

“The decline in dollar long-term interest rates since the onset of the COVID crisis has led to a tightening of long-term yield spreads between the United States and other countries and to a depreciation of the dollar against these countries’ currencies. This can be seen for example against the euro, the yen and the renminbi. This effect of lower US long-term interest rates has also showed up in gold prices.”

“The decline in US long-term interest rates and the tightening of long-term yield spreads between the United States and the other countries have therefore led to a depreciation of the dollar. This means that demand for dollars falls when dollar interest rates decline.The decline in dollar long-term interest rates led to sales of dollar-denominated bonds by non-US residents.”