Special thanks to Jack Farley of Monetary Matters for putting together this interview. Please make sure to subscribe to Jack’s Youtube channel when you get a moment.
The U.S. dollar has long been the linchpin of the global financial system, but whispers of its demise have grown louder in recent years.
With the U.S. Dollar Index (DXY) sliding from 110 to 97, some predict a further plunge to 87 or even 80, envisioning a world where the dollar crumbles into obscurity.
Yet, despite these dire forecasts, the dollar’s resilience remains a formidable force.
Why does the greenback continue to defy its critics, and what could a surging dollar mean for global markets?
Let’s dive into the dynamics driving the dollar’s enduring strength and explore why betting against it might be a risky wager.
The Dollar’s Global Grip
The U.S. dollar isn’t merely the currency of the United States…it’s the lifeblood of global finance.
Over the past 50 years, every major financial crisis, from the Long-Term Capital Management collapse to the Global Financial Crisis and the COVID-19 market shock, has coincided with a rapidly appreciating dollar.
This isn’t a coincidence.
The dollar’s dominance stems from its role as the world’s primary reserve currency, used in the majority of global transactions. But what makes this currency so indispensable, even as critics point to America’s staggering $37 trillion national debt?
The answer lies in the dollar’s global reach. Beyond U.S. borders, an estimated $70–100 trillion in dollar-denominated debt exists, owed by foreign governments, corporations, and financial institutions.
This debt, often held in the shadowy Eurodollar market…a network of non-U.S. banks and entities dealing in dollars…creates an insatiable demand for the greenback.
When global economies falter, the need to service this debt intensifies, driving dollar demand higher.
A falling local currency against the dollar makes these obligations even costlier, squeezing borrowers from Jakarta to São Paulo. So, why does this dynamic make the dollar a safe haven during crises, and could it backfire?
Why the Dollar Surges in Crises
Contrary to popular belief, a strong dollar isn’t just a bullish signal for U.S. markets…it’s often a harbinger of global financial tightening.
When asset prices plummet and credit spreads widen, the dollar tends to surge, not because of U.S. economic strength but due to a global scramble for dollars to settle debts.
This phenomenon, often misunderstood, has played out repeatedly. In 2008 and 2020, brief dollar sell-offs during initial market panics quickly reversed as investors rushed to cover dollar-denominated liabilities.
Consider the events of April 2025, dubbed “Liberation Day,” when markets briefly panicked over proposed U.S. tariffs. The dollar dropped 5% in two weeks, mirroring similar short-lived declines in September 2008 and March 2020.
In both prior instances, the dollar soon reversed sharply higher as crises deepened.
Why?
The U.S. acts as the world’s piggy bank, attracting global capital seeking safety in U.S. Treasuries and assets.
When fear grips markets, investors tap this piggy bank, only to find that dollar demand spikes as liabilities come due.
Could this pattern repeat if global markets face another shock, or are we on the cusp of a new financial paradigm?
The Tariff Tantrum
The re-emergence of tariffs under a new U.S. administration has reignited debates about the dollar’s trajectory.
Critics argue that tariffs, by raising costs and diverting capital flows, could weaken the dollar. Yet, the evidence suggests otherwise.
In April 2025, markets briefly sold off amid tariff fears, but the dollar stabilized and has since traded sideways. This resilience reflects a deeper truth: the U.S. consumer market, the largest in the world, remains a magnet for global exporters.
Even with tariffs, foreign manufacturers…think Japanese automakers absorbing tariff costs to maintain U.S. market access…are unlikely to abandon this lucrative market.
Tariffs may indeed be inflationary, potentially raising prices for U.S. consumers.
However, the notion that they’ll trigger a dollar collapse overlooks the global demand for dollars.
Foreign producers, laden with dollar-denominated debt, will continue selling to the U.S., even at lower margins, to service their obligations.
Moreover, some may relocate production to the U.S. to sidestep tariffs, further bolstering domestic economic activity.
But what happens if tariffs escalate beyond expectations, and how might this reshape global trade dynamics?
The Sovereign Debt Dilemma
A looming concern is the specter of a sovereign debt crisis, not just in the U.S. but worldwide. With U.S. debt at $37 trillion and global dollar-denominated debt potentially exceeding $100 trillion, rising interest rates could ignite a firestorm.
If U.S. Treasury yields climb to 6% or 7%, bond prices could fall 20–30%, hammering the balance sheets of foreign banks, central banks, and corporations holding these assets as reserves.
A U.S. crisis would ripple globally, as the value of these reserves plummets, forcing institutions to scramble for dollars to shore up their finances.
This scenario played out in 2022, when the Federal Reserve’s rapid rate hikes pushed Treasury yields higher and the dollar to a 30-year high.
The fallout was global: the UK’s gilt market teetered, Japan’s yen plunged 25%, and China’s real estate sector buckled under deflationary pressures.
The European Central Bank, even as it raised rates, was forced to buy peripheral sovereign debt to stabilize markets.
If U.S. yields spike again, could the dollar’s strength exacerbate a global crisis, or might another currency emerge as a safe haven?
Gold and the Swiss Franc: Alternatives or Illusions?
In a full-blown sovereign debt crisis, could another currency challenge the dollar’s dominance?
Gold, often seen as a hedge against currency debasement, could shine, but its practical use in global transactions is limited.
The Swiss franc, backed by Switzerland’s reputation for stability and a relatively small currency float, might also gain traction due to external demand.
However, larger currencies like the euro, yen, or yuan face significant hurdles.
Europe’s fiscal woes, Japan’s debt burden, and China’s deflationary pressures make their currencies unattractive in a crisis.
Betting on a dollar collapse assumes a fundamental rewiring of global finance…a risky proposition given the dollar’s entrenched role.
So, what could tip the scales toward a true de-dollarization?
The U.S. Consumer
The U.S.’s economic edge lies in its consumer market, the world’s largest and most coveted.
Global exporters, from Chinese tech giants to Brazilian commodity producers, rely on American buyers to sustain their economies.
This gives the U.S. immense leverage, akin to a customer demanding a discount from a desperate supplier.
Even if tariffs raise costs, foreign producers are likely to absorb some of the pain to maintain access, as seen with Japanese automakers.
Meanwhile, U.S. technology exports…think Microsoft’s cloud services or Nvidia’s AI chips…further cement America’s dominance, as countries like Saudi Arabia rely on U.S. infrastructure for their economic ambitions.
This dynamic suggests that while tariffs may cause short-term volatility, they’re unlikely to dismantle the dollar’s strength.
Instead, they could drive manufacturing back to U.S. shores, boosting domestic growth.
But what if global exporters find alternative markets, and could this erode America’s economic leverage over time?
The Fed vs. the Treasury
A subtler but equally critical dynamic is the tension between the Federal Reserve and the U.S. Treasury.
Historically, the Fed’s autonomy has been sacrosanct, but it’s not untouchable.
As the Treasury, under the executive branch, pushes for policies like lower interest rates to weaken the dollar, the Fed’s reluctance to comply could spark conflict.
Recent anecdotes…such as a U.S. president inspecting the Fed’s costly renovation of its Washington headquarters…highlight this friction.
In a sovereign debt crisis, this battle could intensify, with the Treasury demanding actions to stabilize the dollar or markets, potentially at odds with the Fed’s priorities.
This tension underscores a broader truth: the U.S.’s ability to manage its debt and currency hinges on coordination between these institutions.
If they clash, market volatility could spike, further strengthening the dollar as a safe haven. But how long can this delicate balance hold, and what might trigger a full-blown confrontation?
Tactical Trading: Is the Dollar Poised for a Rebound?
Despite its recent weakness, the dollar may be primed for a rebound. Sentiment is at historic lows, with investors heavily shorting the greenback, expecting further declines.
Technical indicators suggest the dollar is oversold, while currencies like the euro are overbought.
This setup mirrors past reversals, where contrarian bets against consensus paid off. While tariffs and anticipated rate cuts have fueled bearish sentiment, much of this is already priced in.
A sudden market shock…say, a sharp sell-off in global equities…could trigger a dollar rally, catching investors off guard.
For portfolio managers, this suggests a nuanced approach: holding short-term U.S. Treasuries for safety, U.S. equities for growth, and gold as a hedge.
Real estate and tactical trades, like oil or equity hedges, can further balance risk.
The goal isn’t to bet solely on a dollar surge but to avoid catastrophic drawdowns while capturing market upside.
So, how should investors position themselves for a potential dollar rally, and what pitfalls should they avoid?
Why the Dollar Endures
The dollar’s critics have a point: U.S. debt levels are daunting, and fiscal discipline seems elusive.
Yet, the same could be said of Europe, Japan, and China, where fiscal challenges are equally severe.
The U.S.’s unique advantage lies in its ability to “export” its currency through global demand, allowing it to print money without immediate inflationary consequences.
Unlike other nations, whose currencies lack global appeal, the dollar’s drain…its absorption by foreign markets…keeps it afloat.
This doesn’t mean the dollar is invincible.
A sovereign debt crisis could eventually materialize, but its timing remains uncertain. For now, the U.S.’s consumer market, technological prowess, and financial infrastructure make it a safer bet than most.
As global volatility looms, the dollar’s strength may once again surprise its detractors.
Will the next crisis cement its dominance, or could an unforeseen shift finally dethrone the greenback?
Only time will tell, but for now, the dollar remains the world’s financial anchor.
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