US debt has just surpassed 100% of GDP. Budget and trade deficits are reaching 7% of GDP annually. Yet the US dollar remains stable at 1.1750 against the euro at the time of writing, and Treasury bonds continue to attract foreign capital. Unprecedented. 💵
🔍 What's going on?
The United States has been defying classical economic logic for years. Despite persistent twin deficits, the US dollar maintains its status as the world's reserve currency. Interest rates remain historically low, while debt is exploding.
This situation is explained by the massive structural demand for USD-denominated assets. China and Germany, major exporters, recycle their savings surplus into American financial markets. This finances US deficits and keeps borrowing costs manageable.
Donald Trump's major budget bill should widen deficits even further in the coming years. Yet investors remain relatively unfazed by the scale of debt. They continue buying Treasuries as if nothing is wrong.
💡 Why does it matter?
For us forex traders, this resilience of the US dollar directly impacts our positions on EUR/USD, USD/JPY and all major pairs. As long as reserve currency status holds, the dollar remains a safe haven in times of crisis.
But several phenomena could change the game. Geopolitical fragmentation of trade, the rise of central bank digital currencies, and above all chronic fiscal recklessness could drive investors away from the US dollar. If interest rates remain elevated for a long time, the cost of servicing debt could become unsustainable.
Conversely, if artificial intelligence generates real productivity gains, US growth could rebound and reduce the debt burden. The debt-to-GDP ratio is hypersensitive to macro assumptions. A small deviation in growth or rate forecasts changes everything.
📊 Our view
In our opinion, this exorbitant privilege of the dollar won't last forever. It's just a matter of time.
The fundamentals are deteriorating. A 7% deficit relative to GDP in peacetime and growth is historically unprecedented for a major economy. Structural demand for USD remains strong today, but it rests on confidence in American institutions. Yet this confidence is eroding. China is diversifying its reserves, the BRICS are multiplying initiatives to bypass the dollar, and central banks are buying physical gold massively. In the eurozone, the ECB and ESMA are watching these developments closely. If the dollar loses its privileged status, the euro could benefit, but turbulence would be massive across all major pairs.
We believe the dollar remains solid in the medium term, but risks are accumulating. For the FR trader. We remain long USD on major pairs as long as US rates stay attractive, but we're closely monitoring signals of diversification in global reserve holdings.
✅ Key takeaways
- US debt at 100% of GDP, deficits at 7%
- The dollar remains a safe haven thanks to reserve currency status
- Geopolitical fragmentation and CBDCs threaten this dominance
- Debt-to-GDP ratio highly sensitive to macro assumptions
What do you think? Can the US dollar hold up for another 10 years with such debt, or are we heading toward a major geopolitical shift?
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