Since the beginning of 2025, it has been a great time to invest in foreign currency sovereign bonds on a total return basis. In this time period, the US dollar has declined a little under 9% and many foreign interest rates have been higher than US dollar rates. However, if the US dollar were to strengthen, the benefits of the yield pick-up in foreign currencies will deteriorate. A rising dollar reduces the yield advantage of foreign currency investing in total return terms.
As example Etherfuse’s Brazilian short-term sovereign bonds have an APY of 13.06%. The US treasury Etherfuse short-term bonds have an APY of 3.91%. A dollar investor going to Brazilian Tesouros gets a yield pick-up or carry of 9% versus the US dollar. If the US dollar appreciates less then 9% in value versus the Brazilian real, the trade is profitable.
When tariffs were announced on April 1st the US dollar went up. Since that time, foreign currencies have recovered and yield pick-up trades have done well.
When tariffs were confirmed on July 31st and implemented on August 1st, the currency movements were interesting. On July 31st foreign currencies declined and the US dollar rose, but they all bounced off the lows by the end of the day. Some like the Mexican peso were unchanged. Dollar strength did not hold.
On August 1st, tariff implementation day, foreign currencies went up. The Euro appreciated more than 1%, the Brazilian real appreciated .74%, and the peso was unchanged.
Tariff implementation should boost the US dollar value. US tariffs slow exports to the US, and lower exports to the US reduce economic growth in foreign countries. To counter the impact of lower economic growth, Central banks lower interest rates, making the yield on their bonds less attractive, which normally causes their currencies to go down in value versus the US dollar.
But on August 1st the day tariffs were implemented, the US dollar declined; the dollar index (DXY) went down 1.18% and the Euro rose 1.37% .
The US dollar move can be explained by the US labor reports, which showed labor market weakness; US job growth cooled in the past three months, and the unemployment rate rose. Given labor market weakness, investors now believe the US Fed will lower interest rates in September, which would put downward pressure on the value of the US dollar.
The key question is- will one month of US labor weakness lead the US Fed to begin an aggressive campaign of lowering interest rates in September? If they lower interest rates aggressively, the US dollar will go down, benefiting yield pick-up trades of bonds in foreign currencies.
Although there may be a cut in September, it is hard to imagine a large cut, or a signaling that more cuts are coming. The impact of tariffs on inflation is not yet known. In the end, rates not going down as fast as anticipated could keep the US dollar stable or allow for mild appreciation.
Given the potential a slower than expected rate cutting program, it is best to seek trades with the biggest yield pick-up, or currencies with low chances of depreciation against the US dollar. Brazil and Mexico fit this bill. The yield pick-up in Brazil is 9%, which means things must really change for the US dollar to go up 9% and wipe out the yield differential. The Mexican peso has shown its mettle by holding value in a tumultuous time, and the Mexican government seems to be in a good place with the US, unlike many other countries.
In conclusion, a portfolio composed of Etherfuse Tesouros and Mexican Cetes should perform well versus US treasuries until more is known on interest rates and tariffs.
This blog is for educational and informational purposes only, covering general market trends, industry developments, and asset features. Nothing herein is investment advice, a solicitation, or a recommendation to buy or sell any assets. Etherfuse and its guests may hold stakes in some or all of the assets discussed.
