The Bank of America analysts have raised an alarm that the US dollar, currently seen as overvalued, is inching toward fair value. According to them, the dollar could fall below fair value by 2026 due to uncertainty from Trump’s financial shift.
The dollar has lost a lot of value in the past few months, just when it was about to hit new highs. After Liberation Day, it went down even more quickly because of the tariff news, which led to slower growth and higher inflation in the US.
The US dollar measure is down 10% year-to-date, making this the worst first half since at least 1980.
The dollar steadies ahead of labour market data
On Monday, the dollar hit its lowest level in five weeks. However, today, the dollar index, which measures the greenback against a basket of currencies including the yen and the euro, rose 0.21% to 98.355 after dropping in the previous session. It had hit 97.552, its lowest level since July 28, and had changed little since then.
BOA analysts see the euro climbing to $1.20–$1.25 from $1.1651, raising questions about global currency balance. Meanwhile, at the beginning of the week, the euro was up 0.35% to $1.1724, while sterling edged 0.18% higher to $1.3528.
The CME FedWatch tool shows that money markets now think there is an over 90% chance that the Fed will cut rates by 25 basis points in September and by another 100 basis points by fall 2026. Investors will be paying close attention to the US nonfarm payrolls report on Friday. Private payrolls and job openings data will come out first.
The US debt’s influence on the dollar
Even after Trump has touted his second term as a year of cost-cutting and efficiency, the Department of Government Efficiency’s months under Elon Musk are fading from view. The Oval Office raised eyebrows with its One Big Beautiful Bill Act (OBBBA), which Trump called the largest tax cut in history for working and middle-class Americans.
According to Americans, that is not how debt works. If an entity, public, private, or individual, wants to reduce its debt, it has two options: borrow less or bring in more. Reducing tax revenue deliberately brings in less, and the Trump administration’s borrowing hasn’t shown signs of meaningfully slowing.
For example, the Congressional Budget Office said the OBBBA will add $3.4 trillion to the national debt. However, they also said that tariffs will bring in enough money to cover most of this cost.
At the moment, America’s debt pile stands at $37.3 trillion, and as of July, the US government’s cost for maintaining that debt stood at more than $1 trillion, which is 17% of the federal budget for the entire year.
According to data, about $30 billion a month will come from tariffs; however, this won’t even come close to covering the monthly payments needed to service the debt, let alone pay off the base amount.
According to figures from the Treasury, the interest paid on Treasury notes in July alone was $38.1 billion. Also, interest on Treasury bonds worth $13.9 billion, Treasury floating rate notes (FRN) worth $2.85 billion, and Treasury inflation-protected securities (TIPS) worth a total of $6.1 billion should be added. Huge amounts of money are being spent: $60.95 billion for the month.
According to Ray Dalio, an American hedge fund manager, the US faces a “debt-induced heart attack” within three years under Trump’s budget policies, citing unsustainable borrowing and soaring interest costs. This will have a big effect on the dollar as a reserve currency.
If you're reading this, you’re already ahead. Stay there with our newsletter.
