Gold and bitcoin climb as U.S. deficit worries revive the "currency depreciation" trade

CoinDesk reports that expanding U.S. fiscal deficits and a swelling national debt are reigniting what Wall Street dubs the "currency depreciation trade". The pattern is familiar: gold and bitcoin strengthen, the dollar softens, and long-dated Treasuries stay under pressure. The U.S. Department of the Treasury is ramping up its buyback program. Last week it said it will lift the single-limit for Treasury repurchases from $2 billion to at least $4 billion. Two senior Treasury officials later signaled the department could also draw on funds in its general account to support the effort. The shift comes as the U.S. monthly budget deficit hit a five-year high in July and total federal debt topped $40 trillion. Treasury Secretary Scott Bessent previously said the department has "many tools" to help stabilize the government bond market. Investors appear less focused on the buyback size than the message it sends. Stephen Coltman, head of macro at ETF issuer 21Shares, said the announced amounts are small relative to the overall market, but the signaling effect is meaningful. Gold and bitcoin have been moving higher together as investors seek assets viewed as better hedges against eroding currency purchasing power, including precious metals and crypto. Gold rose to a three-month high on Monday after gaining more than 5% the prior week. August is on pace for its largest monthly increase since 1999, with prices up for five straight weeks. Bitcoin climbed 2% on Monday to its highest level since May. After a three-day cumulative gain of 22%, it notched its biggest three-day rise since 2023. During Asian trading on Tuesday, bitcoin briefly touched $80,000. The dollar has moved the other way. The U.S. Dollar Index, which tracks the greenback against six major currencies, fell to its lowest level in nearly three months last week, declined in three of the past four weeks, and was essentially flat on Monday. Long-term yields remain elevated. Despite the Treasury's bond repurchases, the market has not meaningfully stabilized. Last week long-dated yields jumped, with the 30-year yield nearing 5.34%—close to a roughly 20-year high and well above 4.82% at the end of June. After the buyback announcement, yields initially dipped before rebounding, suggesting bond investors see current steps as insufficient. Nohshad Shah, head of fixed income sales at Citadel, said such operations may offer temporary support to Treasuries but could further weaken the dollar and add to inflation pressures. He added that if the dollar keeps falling and financial conditions loosen, the Federal Reserve may be forced to keep policy tighter. CME FedWatch data shows markets now price a 56% probability of a Fed rate hike in October, up more than 7 percentage points from a week ago. Wall Street remains split on how far the trade can run. Deutsche Bank analyst Michael Hsueh said gold could surpass the bank's $4,800-per-ounce target, arguing that shifts in Treasury policy have strengthened his bullish view. Bridgewater Associates founder Ray Dalio also said U.S. public finances are at a turning point, warning that failing to address the issue early could push debt to levels that are difficult to resolve without enormous costs. Others say it is still too soon to fully commit to the "currency depreciation trade." Alexander Lis, chief investment officer at Social Discovery Ventures, said its durability remains uncertain unless investors can confirm the Fed will align with the Treasury's direction.