There are many reasons why they are not converted. For one, the business with Tether started when Bitfinex was hacked. Secondly, AFAIK many exchanges including

There are many reasons why they are not converted. For one, the business with Tether started when Bitfinex was hacked. Secondly, AFAIK many exchanges including Bitfinex had trouble letting people withdraw USD. I am not entirely sure if that has changed recently. So, in both cases Tether acts as a counterparty to BTC trades. In most cases, the BTC/USD pair is not actual USD but TUSD.