When Strong Becomes Weak: The Case for a Depreciating USD
For decades, the U.S. dollar has been the financial world’s anchor. Its dominance began in 1944 at Bretton Woods, when the U.S. convinced allies to peg their currencies to the dollar, while the dollar itself was backed by gold. This system effectively made the “greenback” the centre of global trade.
Then, in 1971, President Nixon ended the gold standard, “de-linking” the dollar from gold.
While this gave the U.S. more flexibility to print money and run deficits, it also meant the dollar’s value now relied entirely on trust in America’s fiscal and monetary discipline.
That trust has been remarkably strong for decades. The dollar became the default currency for global trade, energy pricing, and central bank reserves. Investors worldwide came to view it as the safe harbour.
But today, that credibility is being tested like never before. Behind the curtain, a dangerous game is being played between the U.S. Treasury and the Federal Reserve – one that seems to already be reshaping how the world views the dollar.
From Creditor to Debtor
Not long ago, the U.S. was the world’s largest creditor. Today, it is its largest debtor.
With over US$37 trillion in outstanding debt and annual deficits now exceeding US$2 trillion, the math is becoming impossible to ignore.
Each year, Washington must borrow more just to cover its spending – and much of that borrowing goes toward paying the rising interest bill itself.
Recently, the interest expense on the U.S. debt has accounted for roughly 18% of all tax revenues. For every $1.00 brought in, ~$0.18 might go to interest expense alone.
This is more than defense spending in the country, which is famously a major spending item. Investors and credit rating agencies are beginning to ask: How sustainable is this?
The “Game” Between Treasury and the Fed
Here’s where the game comes in. The U.S. Treasury issues bonds to fund the deficit. Normally, global investors line up to buy those bonds, trusting the U.S. to pay them back. But with confidence slipping, demand isn’t what it used to be.
To keep things moving, the Federal Reserve (the country’s central bank, responsible for monetary policy, which has historically operated independent of the U.S. administration) has been pressured, namely by the U.S. administration and specifically the Treasury, to artificially suppress interest rates.
That makes debt cheaper for the government, but less attractive for outside investors. Lower yields mean weaker demand for U.S. bonds, and by extension, weaker demand for U.S. dollars.
Historically, interest rate cuts have been used to stimulate the economy and support financial markets and business activity (lower interest means cheaper capital and easier business). Today, the major indices for most major financial asset classes are at all-time highs. Economic data has generally been steady. With this backdrop in mind, today’s economic environment isn’t one for which interest rate cuts are logical, based on historical standards.
Add in political dysfunction and ballooning deficits, and the dollar no longer looks like the unquestioned “safe asset” it once was.
The administration won’t explicitly agree that this is what’s happening, but it’s a logical conclusion when connecting the dots.
For example, Stephen Miran, a recent Fed-appointee aligned with the administration, broke ranks at the most recent Federal Reserve Open Market Committee meeting (where interest rate policy is set) and was the lone vote in favour of a steeper 0.50% cut vs. only 0.25%.
Concurrently, Lisa Cook, one of the more independent voices on the board, has been abruptly dismissed.
It is also somewhat telling that Scott Bessent, the head of the U.S. Treasury, has said that he plans to use shorter-term debt to finance the U.S. deficits; shorter-term debt is most closely impacted by interest rate policy i.e., lowering interest rates has a direct impact on the interest cost for short-term debt, more so than for long-term debt.
For global investors, these developments reinforce the fear that monetary policy is being shaped more by political agendas than by economic fundamentals, further eroding confidence in the U.S. dollar.
How Currencies Really Work
At its core, currency values are about supply and demand:
- More dollars printed = more supply = weaker value
- More global investment into the U.S. = higher demand = stronger value
For decades, the U.S. had both: it was the world’s hub for opportunity, business, and innovation. Capital flowed in from everywhere, creating steady demand for the dollar.
But now? Investors are questioning U.S. fiscal credibility, businesses are wary of protectionist policies, and foreign central banks are slowly diversifying into other assets like gold.
Capital is flowing more selectively and “safe” doesn’t automatically mean “American” anymore.
A Common Point of Confusion – Currency Pairs and Inflation
One thing that makes currencies tricky is that they have two kinds of value.
On one hand, there’s what a dollar buys inside its own country – its domestic purchasing power.
On the other hand, there’s what that same dollar is worth relative to another currency – for example, how many Canadian dollars you can get for one U.S. dollar.
That second part is often confusing, because it means the dollar can weaken internationally, even if prices at home feel relatively stable.
Currencies are measured in pairs, or by one currency in terms of a basket of others, and shifts in global capital flows, trade, and investor confidence can push those exchange rates in ways that don’t always line up neatly with what we feel in our day-to-day lives.
Inflation, for example, can be interpreted as changes in the “CPI” or the “Consumer Price Index,” which is a fixed basket of goods and services; because the contents of the basket are fixed, changes in its value tell us about overall price changes, or the value/purchasing power of a currency.
For example, the price of a chocolate bar may have been $0.10 some years ago, but that chocolate bar might now be $3.00. The chocolate bar isn’t necessarily worth more; the currency buys less (has less purchasing power and is less valuable). This is inflation.
Why Canada Stands To Benefit
The Canadian dollar, by contrast, has some tailwinds. While Canada also carries debt, it’s nowhere near the scale of America’s. Our resource-rich economy – energy, minerals, agriculture – provides a natural foundation for demand. And as Canada gradually lowers interprovincial trade barriers and invests in major projects, it becomes an increasingly attractive place for capital to flow.
This doesn’t mean the loonie will soar overnight, but the trend is clear: in relative terms, the Canadian dollar looks steadier, while the U.S. dollar faces structural headwinds.
What This Means For Investors
For cross-border investors, this isn’t just a story about Washington. Currency exposure has real consequences in your portfolio.
A weakening U.S. dollar means that Canadian investors holding U.S. assets may see reduced returns when measured back in Canadian terms.
On the flip side, shifting some exposure to Canadian-denominated investments can help mitigate that risk.
The Big Picture
The U.S. dollar’s supremacy isn’t disappearing tomorrow. But the forces that once made it unshakeable – trust, credibility, and global demand – are eroding.
Meanwhile, Canada is positioned as a relative beneficiary.
For long-term investors, this reinforces the importance of selective diversification (different from the traditional “broad-based” diversification), not only across asset classes but across currencies and geographies.
Key Takeaway:The U.S. dollar’s power was built at Bretton Woods and reinforced for decades by trust in America’s financial discipline. Today, with record debt, fiscal gamesmanship, and weakening confidence, that trust is cracking. For Canadian investors, this highlights the importance of diversification and the relative opportunity in Canadian-denominated assets.