Why the USD Remains Strong? Insights from a Debt-Based Monetary System.

Key Points

Research suggests the USD’s strength despite economic interventions like bailouts and QE is due to the global monetary system’s design, not American exceptionalism.
It seems likely that the debt-based system creates a carry trade dynamic, favoring the USD as the U.S. operates in one currency, while others manage dual currencies.
The evidence leans toward other countries facing structural disadvantages, with floating exchange rates always working against one of their carry trades.
Controversy exists around whether Trump’s tariff policies will weaken or strengthen the USD, with some arguing they may reinforce its dominance.

Introduction

Have you ever wondered why the U.S. dollar remains strong despite massive economic interventions like bailouts and quantitative easing? My latest research paper, The Persistent Strength of the USD: A Debt-Based Monetary System and Global Carry Trade Dynamics, dives into this paradox. It reveals that the USD’s resilience isn’t just about U.S. economic might—it’s rooted in the very structure of the global monetary system. I explore how this system disadvantages other currencies and why President Trump’s tariff strategies might inadvertently bolster the dollar further. Intrigued? Check out the full paper here: [link to your paper].

Background

The paper examines why the USD stays strong even as the Federal Reserve expands its balance sheet from $0.85 trillion in 2008 to $7.4 trillion by May 2025, according to Federal Reserve data. It challenges the idea of American exceptionalism, arguing instead that the system’s design, where money is created through debt, gives the USD an edge.

Key Findings

I found that the global monetary system operates like a carry trade, where the U.S. benefits from using only USD, while other countries juggle their local currency and USD, facing constant exchange rate risks. This structural advantage, amplified by the Eurodollar system, explains the USD’s strength. Trump’s policies, like tariffs, aim to reset this, but they might actually strengthen the USD by signaling economic confidence.

Survey Note: Detailed Analysis of USD Strength and Global Monetary Dynamics

Overview and Context

The U.S. dollar (USD) has maintained persistent strength despite extensive economic interventions, such as bailouts, stimulus packages, and quantitative easing (QE), which might typically weaken a currency. As of May 2025, the Federal Reserve’s balance sheet stands at $7.4 trillion, up from $0.85 trillion in 2008, yet the USD’s trade-weighted index (DXY) rose from 80.9 in 2011 to 100.04 by May 2025, near its highest level since 1985 Trading Economics. This resilience has puzzled economists, with some attributing it to “American exceptionalism,” the notion that the U.S. economy’s dynamism uniquely supports its currency Chatham House. However, this paper challenges that view, arguing that the USD’s strength stems from the structural design of the global monetary system, which is debt-based and inherently leveraged.

Drawing on economic analyses Santiago Capital, we conceptualize this system as a global carry trade, where economic actors borrow in low-yield currencies to invest in higher-yield assets. The U.S. operates a single-currency carry trade in USD, while other countries manage dual-currency carry trades (local currency and USD), creating a structural disadvantage. Floating exchange rates, functioning as a zero-sum game, ensure that non-USD economies face persistent losses in one of their carry trades, reinforcing USD dominance. The Eurodollar system, a vast offshore USD market estimated at $10–15 trillion BIS, amplifies this effect, making the USD carry trade globally dominant. Recent efforts by President Donald Trump to “reset” this system, through tariffs and currency policy, reflect concerns over trade deficits ($800 billion in 2024 U.S. Census Bureau) and debt sustainability, but face significant challenges due to the system’s entrenched nature.

The Debt-Based Monetary System and Carry Trade Dynamics

Modern monetary systems are debt-based, meaning money is created primarily through lending rather than by printing physical currency. When a bank issues a loan, it creates a deposit, effectively expanding the money supply Workable Economics. This process is facilitated by fractional reserve banking, where banks hold only a fraction of deposits as reserves, allowing them to lend out the remainder. For example, the U.S. eliminated reserve requirements in 2020 Federal Reserve, increasing leverage. As a result, the total amount of money in circulation is a multiple of the actual reserves, creating a leveraged system.

This debt-based framework means economic growth is tied to debt expansion. Economic actors—households, firms, and governments—borrow to fund activities with expected returns exceeding the cost of debt service, known as the “carry.” This dynamic is akin to a financial carry trade, where investors borrow in a low-interest-rate currency to invest in higher-yielding assets, profiting from the yield differential Investopedia. For instance, during the 2008 financial crisis, when returns on mortgage-backed securities fell below debt service costs, widespread defaults triggered a global recession Investopedia.

For the U.S., this carry trade operates solely in USD, as it issues debt and conducts trade in its own currency. The Federal Reserve’s policies, such as QE, lower borrowing costs by purchasing assets (e.g., $4.5 trillion in bonds from 2008–2014 Federal Reserve), stimulating activity while maintaining USD demand due to its reserve status. Other countries, however, manage dual carry trades: one in their local currency and one in USD, as global trade and debt are predominantly USD-denominated (58% of global reserves in 2024 IMF). This dual burden introduces currency risk, as exchange rate fluctuations can increase debt costs or reduce export competitiveness.

The debt-based system’s reliance on continuous growth to service debt creates vulnerabilities. If economic growth slows, as seen in developing countries with high USD-denominated debt, defaults can cascade, destabilizing economies UNCTAD. The U.S., insulated by its single-currency carry trade, faces fewer such risks, reinforcing USD strength.

USD’s Unique Position and the Dual-Currency Burden

The USD’s role as the world’s primary reserve currency, established at Bretton Woods in 1944, grants the U.S. unique advantages, often called the “exorbitant privilege” Brookings. It can issue debt at low rates due to global demand for Treasuries ($28 trillion market, 25% of global government debt Federal Reserve). This allows the U.S. to run persistent deficits (e.g., $36.56 trillion public debt in March 2025 Wikipedia) without immediate currency devaluation, as foreign demand absorbs USD supply.

Non-U.S. economies face a structural disadvantage, managing carry trades in both local currency and USD. For example, a Brazilian firm borrowing in reais and USD-denominated bonds (e.g., Brazil’s USD debt: $600 billion in 2024 BIS) must generate returns exceeding both interest rates. Floating exchange rates, a zero-sum game, exacerbate this. If the USD strengthens (e.g., DXY up 10% in 2018 J.P. Morgan), the local currency weakens, increasing USD debt costs. If the local currency strengthens, local borrowing costs rise, squeezing margins. This dual burden ensures one carry trade is always under pressure.

The USD carry trade dominates due to its scale. Global USD-denominated debt exceeds $51 trillion in the U.S. bond market alone, with additional foreign USD debt estimated at $14.5 trillion in 2022 World Economic Forum, Reuters. The U.S. benefits from “flight-to-safety” flows during crises, boosting USD demand J.P. Morgan. Other countries, lacking this privilege, face persistent currency risk, as seen in the 2018 yuan depreciation following U.S. tariffs Chatham House.

Historical Evidence of USD Strength

To quantify USD strength, we analyze the DXY and key periods of monetary expansion:

Table 1: USD Index (DXY) and Federal Reserve Balance Sheet Trends

Period	DXY Value	Fed Balance Sheet (USD Trillion)	Key Events
2008	80.9	0.85	Financial crisis, QE begins
2011	71.3	2.8	QE1 and QE2
2015	94.8	4.5	QE3 ends, U.S. recovery
2021	89.9	8.7	COVID-19 stimulus
2022	114.1	8.7	Inflation surge, rate hikes
May 2025	100.04	7.4	Trump tariffs, growth differential

2008–2014 (Post-GFC QE): The Fed’s balance sheet grew from $0.85 trillion to $4.5 trillion. Despite fears of hyperinflation Investopedia, the DXY rose from 71.3 in 2011 to 94.8 by 2015, driven by U.S. economic recovery and global demand for USD assets.
2020–2022 (COVID Stimulus): The Fed injected $3 trillion, and Congress passed $4 trillion in stimulus Federal Reserve. The DXY climbed from 89.9 in 2021 to 114.1 in 2022, reflecting U.S. growth outpacing peers (U.S. GDP growth: 5.9% in 2021 vs. Eurozone: 5.4% IMF).
2024–2025 (Post-Election): Trump’s tariff announcements and fiscal stimulus expectations pushed the DXY to 100.04 by May 2025 Trading Economics. Despite $36.56 trillion in debt, USD strength persisted due to investor confidence in U.S. growth.

These periods show that monetary expansion does not weaken the USD when underpinned by economic vitality and global demand. Non-USD economies, however, faced currency depreciation (e.g., Chinese yuan fell 10% in 2018 post-tariffs Chatham House), increasing USD debt burdens.

Trump’s Policies and Reset Attempts

President Trump’s policies since 2025 aim to address trade deficits ($800 billion in 2024 U.S. Census Bureau) and debt sustainability by weakening the USD. His strategies include:

Tariffs: A 10% tariff on all countries, with higher rates on nations with large trade deficits, effective April 2025 White House. These aim to boost U.S. manufacturing but may strengthen the USD by weakening trading partners’ currencies (e.g., yuan depreciation in 2018 Chatham House).
Currency Policy: Proposals to use the Treasury’s Exchange Stabilization Fund or negotiate a new Plaza Accord to devalue the USD Chatham House. These face challenges due to global currency market scale (daily turnover: $7.5 trillion BIS) and China’s reluctance post-1980s yen appreciation Chatham House.
Fed Pressure: Threats to influence Federal Reserve independence to lower rates Atlantic, risking inflation and further USD strength if markets anticipate tighter policy.

These efforts paradoxically strengthen the USD, as fiscal stimulus and protectionism signal U.S. growth, attracting capital inflows J.P. Morgan. The debt-based system’s design limits Trump’s ability to reset it, as global USD demand persists. Critics argue these policies could destabilize global markets by making the USD too strong Chatham House, while supporters believe they will restore U.S. economic competitiveness White House.

The Eurodollar System’s Role

The Eurodollar system—offshore USD deposits and loans—amplifies USD dominance. Estimated at $10–15 trillion BIS, Eurodollars are created outside U.S. regulation, functioning as a “non-state currency” Santiago Capital. Non-U.S. banks lend Eurodollars, increasing global USD debt and demand. For example, emerging markets’ Eurodollar borrowing grew from $2 trillion in 2008 to $5 trillion by 2024 BIS.

This system reinforces the USD carry trade’s scale, as non-U.S. entities must acquire USD to service Eurodollar debt, even during U.S. monetary expansion. The Eurodollar market’s size dwarfs local currency markets (e.g., Brazil’s real-denominated debt: $1.2 trillion BIS), ensuring USD dominance. Trump’s reset attempts are complicated by this uncontrolled system, as devaluing the USD requires global coordination unlikely in a fragmented economic landscape East Asia Forum.

Conclusion and Policy Implications

The USD’s persistent strength is not due to American exceptionalism but the debt-based monetary system’s design, operating as a leveraged carry trade. The U.S. benefits from a single-currency carry trade, while other countries face dual-currency burdens, exacerbated by floating exchange rates and the Eurodollar system’s scale. Historical data confirm that monetary expansions (2008–2014, 2020–2022, 2024–2025) strengthen the USD when paired with economic growth, disadvantaging non-USD economies.

Trump’s reset efforts, while aimed at reducing trade deficits and debt, are likely to reinforce USD strength due to market dynamics and global demand. Policymakers face a dilemma: weakening the USD risks destabilizing the system, while maintaining its strength perpetuates global imbalances. Future research should explore mechanisms for coordinated currency management (e.g., a new Bretton Woods) and reducing Eurodollar reliance.

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