For years, warnings about the dollar’s impending collapse have centered on two major concerns: the rapid rise in U.S. public debt, which is growing by $3.65 trillion a year, and the soaring costs of servicing that debt.
If we take a closer look, the figures are indeed alarming: debt held by investors, corporations, foreign governments, and the Fed — has reached 100% of GDP, while total gross debt has exceeded 120% of GDP.
As for interest payments, from $881 billion in 2024, they are expected to rise to $952 billion in 2025, and the Congressional Budget Office (CBO) forecasts further increases over the next decade.
The situation would not be so dramatic if U.S. government revenues increased along with rising debt service costs, but the opposite is true: by fiscal year 2024, total government spending reached about $6.75 trillion, while revenues were only $4.92 trillion, resulting in a deficit of $1.83 trillion. Worse, the CBO expects this deficit to increase to $1.9 trillion by 2025, and things will only deteriorate further down the road.
Regarding the DOGE’s efforts to cut spending, including implementing massive layoffs, they could be in vain if Donald Trump follows through with promised tax cuts while increasing defense spending.
Have the markets just woken up to the problem?
The pullback in the dollar index in February appears to have been driven more by Trump’s trade wars and his threats to withdraw from NATO, which have weakened one of the key pillars of the dollar’s dominance.
The 47th president has strained relations with key trading and strategic partners in just a few months if not weeks. And things could only get worse after April 2, when Trump plans to announce major reciprocal tariffs.
If confidence in the U.S. economy, military strength, and political stability declines significantly, central banks could reduce their dollar reserves while shifting away from U.S. Treasuries to assets like gold.
How will Trump respond?
Trump has advocated a weaker dollar during his campaign. But an exodus of capital out of U.S. Treasuries could trigger a rise in yields, which is exactly the opposite of what the U.S. needs right now.
To prevent this, Trump could either ramp up sanctions and impose tariffs on countries reducing their reliance on U.S. debt or soften his protectionist approach and seek compromises with trade partners.
If neither strategy succeeds and capital continues to leave U.S. markets, investors might not choose between the dollar and other currencies; instead, they could seek safety in tangible assets like commodities and gold.