Insight Focus | If the bill comes due

Talk of the demise of the dollar is overblown, but all trust has its limits

Anyone who’s binged at an all-you-can-eat buffet knows how it ends – paying for a painfully bloated stomach. The world’s huge appetite for Uncle Sam’s debt and therefore dollars is still unquenched - for now. That enables the US to run persistent current account* and fiscal deficits*. The US is currently spending $2trn more per year than it raises in revenues and will probably borrow yet more to plug the gap. The total stockpile of US sovereign debt is now so large that interest costs alone account for approximately 18% of tax revenues. At about $800bn a year that’s equivalent to the entire US defence budget. Soon the US may spend more on debt interest than on healthcare.

President Trump’s “big, beautiful” budget bill may push the US to its fiscal limits, and global investors are starting to digest this. US exceptionalism makes this just about sustainable. The implications for the dollar are complex and will take years to unfold. 

Gold standard

In 1944 the Bretton Woods Agreement attempted to stabilise post-war international trade and finance. Since then, the world’s financial architecture has been plumbed in dollars. At first the dollar was convertible to gold at a fixed rate. On the collapse of the gold standard in 1971 the dollar became a fiat currency*, one floating freely against others.  Several factors explain the dollar’s dominance: the sheer size and relative stability of the US’s economy; strong geo-political partnerships and a willingness to backstop global issues; mature and plentiful capital markets; and contracts enforceable by rule of law. All support the dollar as a dependable store of value - a truly global fiat currency backed by the might of the world’s largest economy. Liquid and freely convertible, trusted and peerless.

Foreign lenders currently own around 36% or $8.5trn of the $24trn of US treasuries on the market. Japan holds more than $1trn, China $761bn and perhaps more still through Hong Kong domiciled companies. Does this give them leverage in trade negotiations with the US? Perhaps. But dumping treasuries and flogging dollars would hurt the capital value of the other dollar-denominated assets they own and ultimately be an act of gross self-harm.  The US Federal Reserve could doubtless easily counter such moves.

Greenback weak

Recent dollar weakness is odd. Usually, the currency of a country imposing tariffs strengthens – by 4% for every 10% hike in tariffs as a rule of thumb. But the dollar index (DXY), which measures the greenback against a basket of currencies, earlier this year endured its worst two-month streak since 2002, falling about 10%. Rather than a vote of no-confidence in the dollar, this is probably more about investors selling dollars to buy international investments and needing euros, pounds, Swiss francs or yen.

Trust is at the heart of our financial system that confers global reserve currency status on the dollar. This primacy is uncomfortable for countries which must trade in dollars. With no alternative, they remain a tributary of the US economy. This is why Russia, for example, reportedly transacts some oil contracts in renminbi – China’s currency which it fixes daily against the dollar within a tight trading range. The US can also cut off international pariahs and persona non-grata from the global SWIFT payments messaging system. US-backed sanctions and embargoes may therefore effectively ‘weaponise’ the dollar to weaken a political adversary. Many might like to see an alternative to the dollar emerge. Careful what you wish for.

Future dollars

Might a stablecoin – a type of cryptocurrency typically pegged to a fiat currency – be the dollar’s future? Such speculation may have substance. Yet its value would still be the underlying dollar issued by a government with the authority to set policy, enforce regulations and ultimately use force to collect taxes due. Chatter about Trump’s own $TRUMP meme-coin – a cryptocurrency devised to capitalise on a trend – may be a distraction in this regard.

So, talk of the demise of the dollar today is overdone: a touch of indigestion, uncomfortable and quick. Yet its future is perhaps weakened by the US’s current policymaking. The US remains the world’s economic powerhouse but there are only so many times you can go to the buffet before you’re sick. And the bond vigilantes* will let us know when that is – with potential consequences for the dollar in the long-run. After all, the dollar hasn’t always been the reserve currency. For much of the 19th and early 20th centuries, it was the pound. All things may come to pass.

 

This article was written on 12 June 2025.

 

Simple glossary (*)

Bond vigilante | A common term for bond traders who sell in response to government polices they may consider unsustainable or harmful. This sends the price of bond down and its yield up, thereby making borrowing from and paying debt interest to investors more expensive.

Current account | In simple economic terms, this relates to one country’s financial transactions with the rest of the world. It includes imports and exports, money transfers and income from foreign investments. A negative current account suggests a country received less income than it paid out.

Fiscal deficit | In simple economic terms, this is when a country spends more than it raises in revenues from taxes and other forms of income.

Fiat currency | One which has a floating rather than fixed exchange rate against others.