Monetary refugees
The dollar has lost 10% since the beginning of the year against a basket of currencies (DXY Index). In contrast, gold has risen by 29% in dollar terms over the same period (to 24 July). Another dollar alternative, Bitcoin, has gained as much as gold over the same period, soaring by more than 300% in dollar terms over two years. Is the dollar driving investors away? Are we seeing a monetary exodus?
The weakening of the dollar is all the more curious given the trends in interest rates, which should have strengthened it. The European Central Bank (ECB) has reduced its rates by 200 basis points in total since June 2024, versus a reduction of just 100 basis points by the US Federal Reserve (Fed). The US key rate is thus higher today than that of most of the major central banks. True, inflation is stronger in the US, which tends to weaken the currency. However, even inflation-adjusted real yields remain better in dollars than in most other major currencies. And a cut in rates by the Fed does not look imminent, much to Trump’s despair. Disenchantment with the dollar must therefore be powerful, to offset such an interest rate differential.
The report of the Congressional Budget Office (CBO) suggests one potential reason for this: the state of US public finances is deteriorating rapidly. According to its March 2025 report, public debt will reach 169% of US GDP by 2055, as a result of the budget deficit running at a cruising rate of 6.3% per annum. And at the time, this forecast did not even include the impact of Trump’s One Big Beautiful Bill, which the CBO believes is likely to worsen the budget deficit further. But it is not so much the absolute level of debt that is shocking; it is far higher for Japan. The worry is rather the interest burden that it represents for the public finances. Again according to the CBO, this will grow from 2.1% of GDP on average over the last 50 years, to 5.4% in 30 years, which represents three quarters of the total expected deficit in 2055 (7.3%). This is higher than the proportion of the US budget allocated to defence (2.9% in 2025), or to social security. Furthermore, a large part of this interest will be paid to foreign investors, who hold one third of US debt. This flow will further reduce US domestic revenue, weakening the whole of the economy.
Given this prospect, it is hardly surprising that investors are reluctant to buy the dollar for the long term and are looking for alternative havens such as the euro, the Swiss franc, gold or cryptocurrencies. However, if the euro is less indebted overall, it is not exempt from its own well-known weaknesses, as can be seen from tensions around the French budget in particular. The Swiss franc is certainly safe, but its issue volume is much too low to absorb strong global demand, to the extent that Swiss short rates are again in negative territory. For its part, gold has again become an asset of choice for major institutions, but it remains unwieldy for day-to-day transactions. Cryptocurrencies are much more popular and seem immune to problems of indebtedness. Are they the ideal currency?
Whilst Bitcoin is certainly independent of any debt and state, at least whilst it is accepted by national regulations (the main explanation for its dominance), this is not the case for stablecoins, which are hybrid cryptocurrencies. The latter, which are traded on platforms functioning on blockchains such as Ethereum or Solana, appear attractive thanks to the fixed exchange rate that they offer between a traditional currency and a cryptocurrency. In light of their growing success, the US has just adopted some very clever legislation, the GENIUS (Guiding and Establishing National Innovation for US Stablecoins) Act. On the one hand, this law makes these new dollar-linked currencies secure, by demanding their transparency. On the other, it requires them to be 100%-backed by the greenback. Accordingly, any purchase of a stablecoin that is linked to the dollar, such as USD Coin or Tether, is the same as a purchase of the dollar. The US is thus redirecting flows seeking an alternative back into the official currency. Like a whirlpool, the dollar brings those gravitating on the periphery back to the centre. Monetary refugees are sucked back in, unless they escape the system fully, at the risk of drowning elsewhere.