This is via Commerzbank in an overnight note on US debt, and FX implications. I've summarised (and bolded):

Economists of the conservative Hoover Institution recently warned against the danger of a debt crisis in the US. ... there is one issue that liberals and conservatives agree on: that the US fiscal policy is not sustainable. At some point this will have to be corrected.

For the FX market's judgement what really matters is not so much the current fiscal stance, but the US political system's general ability to adapt to the reality of unpleasant budget restrictions.

  • Is the US political system able to accept those restrictions or would it choose the Greek approach: to ignore those restrictions until at some point in the future a debt crisis arrives?
  • The FX market is not likely to be interested in whether this "point in the future" is in 5, 10 or 20 years.
  • The current US administration's and GOP's approach does not point towards the sustainable attitude, otherwise they would not have agreed on deficit-financed tax cuts while the economy is humming.
  • However, it is sufficient for fiscal sustainability that responsible administrations tidy up every so often (most recently the Clinton administration).

The point is: If US yields were to rise due to rising credit risks premiums (instead of inflation / real-yield reasons) this would result in ... higher US yields should go hand in hand with a weaker dollar.

  • Why? Contrary to Greece (a country that cannot refinance its debt in its own currency - as Greece, like the other euro zone members, does not have an "own" currency) the US debt is held in its own currency. In a fiscal crisis, the US would be able to manage a debt reduction by printing USD and triggering USD depreciation.
  • Is the current USD weakness a risk premium for such a scenario? What does not fit in with the observation that the US yield curve is currently extremely flat (chart 1). Credit risk premiums would cause an unusually steep yield curve. And therefore I struggle to justify the USD weakness with fiscal arguments.

Some interesting points in there for consideration. Overnight the USD strengthened, of course, But the note from Commerz was not intended as a day-trade idea.