The U.S. dollar is treading an uncertain path going forward
In a tug-of-war which the American Administration brought upon itself, expectations are running high…in opposite directions
A “strong” dollar is supported by the Administration and cannot be forfeited: the currency’s eminent position is testimonial to America’s military power, the reliability of its laws and the security of dollar-quoted assets for international investors
At the other side of the ledger, a dollar weakening against major currencies is supportive of a domestic industrial policy, making US exports more competitive while imports will be dearer
Today, a balanced international trade of goods, sought by the Administration and justifying its 'tariff wars', seems to win over the strong dollars
There is no easy outcome because the dollar is many things to different entities
The dollar is a store of value in America and globally, a reserve currency for foreign central banks, a means of exchange for cross-border transactions, a gateway for foreign investment in the US and a weapon of extraterritorial power exposing everyone relying on the dollar
To come true, the expectations of these various constituencies – US consumers, foreign Central Bankers, international traders, foreign investors in America and US government officials – remain entrenched in trust – and the confident belief that the purchasing power of their USD assets is secure and managed in their best interests has to come true
The Power and the Glory
With control over the only global reserve currency comes tremendous power tangled with bewildering uncertainty
The power is for all to see - No currency compares to invest in the world’s premier economy, or in the deepest and most liquid debt market, to operate cross-border transactions between non-American entities or to build-up reserves
The glory comes at a price - The dollar remains central in global transactions, but it is its desirability as stable store of value which encouraged institutions (Central Banks, global banks, businesses...) and investors to hold on to the dollars they own
As an attractive investment, the dollar and dollar-listed assets, especially US Treasury securities, have over the past decades drawn-in foreign capital at low interest rates and favorable terms for the US federal borrower
However, there is no way around the fact that a reserve currency trades on stability and on assurance the currency as store of value is secure...
The major trade shifts and ambitious industrial policies of the Administration upend this familiar framework, generating uncertainty...
Year-to-date, the dollar’s depreciation against the currencies of advanced economies ( -10% against the euro and the Swiss Franc, -6% against the Japanese Yen) is occurring while the long-term yields from US Treasuries went up
Running counter the expectations of the Trump Administration, the currency market is pricing a gamble...and not (yet) success
Tactical challenges grasping for a strategy
At the nexus of conflicted expectations, the dollar’s centrality as reserve currency is the defining feature modeling the yield curve and the shadow looming over the US debt
The US Administration confronts multiple threats exposing its policies to potential failure
- Tariffs may - or may not - feed into inflationary expectations for longer...and weighing on bond yields
- Refunding federal debt, topping 100% of GDP, has become extremely costly (interest expense can be estimated at $1.250 trillion in 2025/2026)...
- The budgetary deficit, this year ($2 trillion) and the following years, deepens financial imbalance ... contributing to a debt-built-up, never quite immune to market turbulence and drifting, unstable like a flat-bottomed boat
- Foreign stakeholders, institutions and individuals invested in Federal debt (32% of total), are potentially becoming more unpredictable...if trust is eroded
Raising tactical challenges on different fronts, the Administration has not delivered on a strategy fusing the issues in a credible action plan and cementing trust
Tariffs will be beneficial to the U.S. budget but, at an est. annual $300 billion, they offset just 15% of the deficit
Industrial policies remains a tangle of projects, sometimes worthy, sometimes less so, with lobbies and self-serving interests at every turn
In federal debt refinancing, the Treasury keeps to the safe grounds of very short term T-bills (rising from 20% to 24% of total Treasuries outstanding), leaving the size of longer term notes and bonds unchanged
Foreign stakeholders, erring on the side of caution, may 'wait-and-see' and postpone commitments to invest in the new U.S. debt - hardly a vote of confidence and a reticence which may push yields on 20- and 30-year bonds beyond 5%
There is no letting-up
Medium-term uncertainties may resolve themselves if allowed the time ...
- ...time for industrial greenshoots to turn into a lush and American garden
- ...time for targeted tech industries (as in semiconductors) to deploy new riches
- ...time for foreign investors to engage with investments in hard assets
- ...time for deregulation to boost profitability in targeted sectors, from AI to energy to finance
Time may resolve everything ...
But Treasury refunding still has to bridge the gap and any misstep may leave the dollar, and the budgetary deficit, more exposed
As of June 30, of total Treasuries outstanding,
- $5.8 trillion in Treasury bills (T-bills) were maturing in a year or less (20% of total)
- $15 trillion of outstanding 2-year to 10-year notes (52%)
- another $5 trillion in 20-year to 30-year bonds (17.5%)
- $2 trillion TIPS -inflation protected securities (7%)
- In total : marketable securities of $28.6 trillion
Roll-over of debt arriving at maturity is estimated at 32% of total $28.6 trillion Treasuries - $9.2 trillion - of which $5.8 trillion are T-bills
New additional debt, resulting from the recently mandated budget act, is estimated at $1.9 trillion - $2 trillion
- Tariff revenue, estimated at $300 billion on annual basis, will weigh on the deficit gap if the projection holds
- Economic growth, strongly advertised by the Administration, would alleviate the gap
For now, the U.S. Treasury is bidding for time, concentrating debt financing (old or new) on the short maturity end of the yield curve : a $1 trillion additional T- bill supply will increase their share to 23-24% of Treasuries total (introducing more potential volatility of financing costs)
The balance of debt financing will presumably be seeded as market conditions allow...
These wait-and-see tactics mirror the prudence of investors...but the margin of error is tenuous
Foreign and US based investors alike will recognize gridlock ...
- if inflation anticipations spill over in the domestic economy
- if expected growth disappoints
- if unresolved tariff policies drift in open-ended conflicts, especially with key allies such as Canada or the European Union
Such unfavorable developments would impact the standing of the dollar, push Treasury yields into the danger range of 5.5 to 6% and ultimately lead to yield curve control
The link between the reserve currency and success of the Administration's policies will be measured in hard numbers: subdued inflation, positive growth rates and mutual acceptance of tariff regulations
These indicators will never start flashing green too soon ...or else...