The U.S. dollar is more of a non-starter when it comes to excitement. There is no center-stage attention commanded by the U.S. dollar, at least usually.

Bank of America (BAC) believes that’s misguided. BAC says the time is ripe to pay very close attention to the greenback right now.

In a recent note, the investment bankoutlined a unique strategy based on the “disorderly” decline in the dollar. What’s the bank consider “disorderly?” A drop of more than 5% in a single month.

In the words of Bank of America, a disorderly dollar decline could trigger a dramatic sell-off in long-dated Treasuries, tighten financial conditions, and rattle markets well beyond foreign exchange markets.

The warning about the dollar is not theoretical; it has real-world implications.

The dollar has been behaving violently over the last two weeks. It fell to a four-year low before quickly rising again after President Trump named former Fed governor Kevin Warsh to succeedJerome Powell.

An important note: the volatility is not restricted to currency markets.

The volatility is ripping through precious metals, not just currencies, shaking up Treasury prices and bringing back a discussion that Wall Street believed it wouldn’t have to have again in 2026: Is the U.S. dollar beginning to trade on policy risk and trust rather thanfundamentals?

Shocking but relevant, considering the importance of currencies.

The dollar is breaking the usual rules.

Photo by seksan Mongkhonkhamsao on Getty Images

Why the dollar’s slide unnerved Wall Street

We are in an intriguing situation. Usually, U.S. yields remain firmly established and unwavering. However, in late January, the dollar went into freefall even as U.S. yields remained higher than those in Europe and Japan.

The disconnect is rare, setting off alarms across FX desks.

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If issues are progressing as normal, higher yields will help sustain currency trends. However, this time, they didn’t.

Instead, volatility in the euro/dollar pair rose to its highest level since July, displaying that investors were willing to pay more to protect themselves against greater swings and that the market was seeing the dollar as a policy tool rather than just a simple rates trade.

Currencies are confidence instruments; when confidence falls, positioning changes quickly, and no confidence is needed.

The rebound that broke commodities

Why the turning point?

This time, we can thank President Donald Trump. It was not a tweet or a press conference, though. It was his nomination of Kevin Warsh to be the next Federal Reserve Chairman that triggered a sharp rebound in the dollar. The fallout, unfortunately, is immediate.

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Gold notched its best month in over 50 years in January, but then plunged sharply, recording its largest daily decline since the early 1980s.

Silver and copper prices dropped substantially from recent highs, while Brent oil prices declined after a big January advance.

Fundamentals do not change overnight. Instead, it is all about positioning.

Many traders got into a “currency debasement” bet that depended on metals rising as the dollar fell. When the dollar bounced back, that idea soon went away.

Volatility is sending a warning signal

For me, the bigger issue is not what the dollar does next. Instead, the issue is volatility and how much policy headlines are driving it.

  • Barclays describes a quantifiable risk premium related to U.S. policy in the dollar.
  • The White House‘s words are affecting prices and making it difficult for foreign investors to hold and covet dollar-based assets.
  • Themos Fiotakis of Barclays believes the most important concern is whether investors lose faith in the U.S. asset base.

The dollar is, at its heart, a rate instrument. When it goes against its nature and starts behaving like a referendum on credibility, volatility usually spikes.

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No one believes it is a mass exodus.

But small changes, on their own, matter. More importantly, they are happening against an enormous backdrop; foreign investors hold roughly $70 trillion in U.S. assets.

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And now Bank of America enters the picture. The note is setting off alarms, forcing analysts and investors to sit up and take notice. Investors, who believe the world’s reserve currency is untouchable, find value in the “disorderly” decline of the dollar.

BofA also spoke about the bigger nightmare scenario: a larger debasement trade, where the dollar declines along with U.S. assets rather than benefiting equities.

That’s the red line; the warning shot. A weaker dollar itself is not the issue; it’s the fact that it drags down everything else that is the issue.

Why the Fed matters more than ever

What is the backbone of the dollar? The Fed’s credibility. That’s why Warsh’s nomination is so eventful and matters so much.

Markets weren’t simply responding to the decision regarding institutional independence. They were reacting to Warsh’s nomination regarding policy shocks becoming more common.

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For now, the market seems to see Warsh as a stabilizer rather than a more radical option, which is one reason the dollar went up.

But the core premise is still true. When the Fed’s independence becomes a trading subject, FX volatility goes up, and everything else is affected.

A disorderly dollar is a real risk

My takeaway is that a weaker dollar isn’t automatically bad for markets. However, what investors need to be aware of is a disorderly dollar.

The past two weeks are a stark reminder that everything is, somehow, connected to dollar stability. From gold and oil to treasuries and equities, everything goes back, somehow or some way, to the dollar.

When the dollar’s confidence wanes, correlations break, and volatility spreads fast.

We’re not in a full-blown “Sell America” moment.

However, BofA’s warning is accurate. The danger isn’t a slow drift down; it’s a move so quick that it compels hedging, selling, and putting Treasuries in the wrong sort of spotlight.

The currency’s fall isn’t the main concern.

The main concern is that investors stop believing the currency will perform as expected. That is the warning sign that you need to take note of moving forward.

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