WILLISTON, ND – JULY 23: Scott Berreth, a derrick hand for Raven Drilling, drills for oil in the … [+]
Major US stakeholders historically loved a strong dollar. Consumers, whether in households or corporations, have arguably been the most prominent voice in US politics for the last few decades. These entities loved a high dollar because it meant major inputs such as energy, mainly from other parts of the world until recently, were cheaper. The other major actor, the government, was fine with a strong US dollar as it was easier to finance everything, including purchases and borrowing. However, both these trends have started to reverse.
Global reserve status, and a strong and stable dollar, has historically meant that it is easier and cheaper for the United States to borrow vs other countries. If you are a foreign country or corporation, you likely require a higher interest rate from countries where you are worried about the currency collapsing. You can hedge it but there is a cost to that, meaning a higher return is required. As a result, governments with stronger currencies find themselves with lower financing costs. This is one of the many reasons that the United States was able to run a deficit decade after decade as the world accumulated bonds. The benefit from a strong currency is starting to change, though, as foreign countries are the largest holders of government bonds, and these same countries are now struggling with the high dollar. This results in less demand for US treasuries at a time when the US desperately needs more buyers.
Interest payments account for over half of the federal deficit in the US, and more bonds need to be sold regularly to finance the growing debt. The problem is that the US dollar has become so strong that foreign governments are being forced to sell their bonds, a US dollar-denominated asset, to meet their dollar obligations as their currencies weaken. Some are even selling bonds to support their currencies. This means less demand for US treasuries; less demand at each treasury auction puts upward pressure on rates. A higher rate means that the US deficit, already over a trillion, increases because the interest on new debt is more expensive. This vicious cycle has already begun; the US can’t risk a scenario where interest payments are rapidly accelerating into a growing deficit. China, Japan, and the UK were significant sellers of treasuries in 2024 as their currencies weakened. For a government already watching interest payments squeeze out critical services, a weaker US dollar, and therefore less interest rate pressure, would be welcome in 2025.
A strong dollar got no complaints from voters and politicians when it made everyone’s energy cheaper. That dynamic is also changing, though. US shale has been the primary source of global supply growth over the last few years, helping lower inflationary energy prices. It’s arguably the only supply source that can contribute meaningfully going forward, and the supply growth contributions from Brazil, Canada, and OPEC are much smaller. With oil in the $70s, though, growth in the US has explicitly slowed, with US shale showing a negligible year-over-year increase in production. Part of this is due to a high US dollar. These companies pay their costs in US dollars. Therefore, they are more susceptible to the high US dollar than most peer countries, such as Brazil. These countries are seeing the price they realize for their oil steadily increase domestically, making it easier for them to grow while US growth stagnates. A high US dollar also hurts emerging markets’ oil demand, putting a ceiling on prices and further capping US growth.
These longer-term structural shifts are coming at a time when Trump’s pick for Treasury Secretary, Scott Bessent, is focused on growing out of the US debt. Increased domestic oil production has been floated as a natural path to achieve this. This is because it creates domestic jobs and growth, while cheap energy from the increased supply lowers rates. All these things make it easier to service the deficit, but they are made more challenging with a strong US dollar. A change in preference towards a weaker dollar would be a new tailwind for commodities and emerging markets, one they haven’t had in a while.
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