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Will the US fiscal deficit lead to a dollar decline?
Jens Søndergaard
Currency Analyst
July 12, 2024

If the US budget deficit keeps growing, will the US dollar’s bull run finally come to an end? That question is top of mind for many investors, who are starting to worry that soaring fiscal spending could depress demand for Treasuries among non-US buyers, which could send the dollar downward.


However, a crisis of this nature does not seem likely, primarily because the US current account appears balanced, relative to history.


Government borrowing must be financed by either the US private sector or international investors willing to purchase government bonds, which results in the US running a current account deficit. While in the past, a significant portion of US borrowing was funded by non-US investors, the composition of the buyer base for Treasury securities has evolved over the last 20 years. Today, the deficit is mostly funded by US domestic savings. 


To be sure, unchecked fiscal spending could create problems and lead to higher rates in the US But even if Treasuries sell off, I believe the dollar could escape relatively unscathed.


US domestic savings have grown alongside budget deficits


The US federal budget deficit is currently around 8% of gross domestic product (GDP). From 1960 until the global financial crisis (GFC), the budget deficit averaged around 5% of GDP. Since 2007, it has been closer to 6%, partly because of higher government spending in response to the GFC and the COVID-19 pandemic. 


Yet as the budget deficit has grown, so too have US private sector savings. Prior to the GFC, when both the US government and the US private sector were borrowing heavily, there was a private savings deficit. But in recent years, savings have since risen to a surplus of nearly 5% of GDP. That’s a big contrast to the 2003–2006 period, when both the government and the US private sector were borrowing heavily.


The US current account deficit peaked at 6% in 2006 but has steadily narrowed since and currently stands at around 3% of GDP as of the start of 2024. This is not historically high.


The US current account deficit has been trending downward

A line chart tracks how much of U.S. government borrowing is funded by domestic (household and corporate) and international buyers. Government borrowing fluctuates throughout the period from 1960 to 2024. From 1960 to the global financial crisis in 2008, government debt stayed below 10% of GDP. Following the GFC, borrowing spiked to 13% of GDP in 2010. It settled back in a range below 10% from 2012 to 2020, before spiking again at the onset of the COVID-19 pandemic, reaching 15% of GDP in 2021. It currently sits at 8% of GDP. The chart also shows a line representing non-U.S. funding of the government’s debt (i.e. the current account balance) and another line showing how much of the debt is funded by domestic savings. The current account balance remained close to zero from 1960 until the 1980s. It grew through the 1990s to peak at 6.2% of GDP in 2006. It has since fallen to 3.1% as of 2024. The amount of government borrowing funded by domestic savings hovered around 5% of GDP from 1960 through the 1990s, when it began falling. Domestic lending went negative in 1998, bottoming out around negative 4% of GDP in 2000. It climbed back above zero, reaching 1.8% of GDP in 2003 before falling again to negative 2.5% in 2006. Since the GFC, household and corporate lending has grown and remains positive, first peaking above 10% of GDP in 2010, and growing to more than 15% of GDP in 2021, following the COVID-19 pandemic. It currently sits at 4.9% of GDP.

Sources: Capital Group, U.S. Bureau of Economic Analysis. Data as of January 1, 2024. Chart shows a four-quarter moving average.

Who is buying US Treasuries?


Prior to the GFC, international investors largely financed the US government budget deficit. Now, the US private sector, specifically households, banks and pension funds, are the primary buyers of Treasury securities. The current account deficit has been trending lower since the first quarter of 2022 and is currently only about half of its peak level, reached before the GFC.


Who funds the US budget deficits now?

A line and stacked bar chart tracks four groups’ US Treasuries purchases from 2008 to 2024 in trillions of dollars. The groups are international buyers, the Federal Reserve, households and non-financial corporations (NFC), and financial institutions. The total purchases are represented by the line. The purchases fluctuate around $2 trillion from 2008 to 2020, when they spike to nearly $5 trillion, mostly split between Fed and financial institution purchases. Purchases recede to above prior levels by 2021 and rise again in 2024 to $2.5 trillion, this time led by international, financial and household and NFC buyers.

Sources: Capital Group, US Federal Reserve. Data as of January 1, 2024. NFC = non-financial corporations.

The Federal Reserve has been both a buyer and seller of US Treasury bonds through its quantitative easing and tightening programmes. More recently, the Federal Reserve has been a net seller of Treasuries. So, while the government deficit is high, it is largely financed by the savings surplus of the US private sector (5% of GDP) and not by international investors, leading to a relatively small US current account deficit of 3% of GDP. If real (adjusted for inflation) interest rates remain high, US private savers should have an incentive to buy Treasuries and help fund the US government.


The bottom line


While investors may be spooked by the growth in US deficit spending, the potential problems that could result may not have a dramatic effect on the currency.


There are scenarios that could lead to a weaker dollar, such as a Trump administration taking control of the Fed and backstopping loose US fiscal policy. A combination of loose US fiscal and monetary policy implies negative US long-term real yields and a weaker US dollar. This scenario could increase the risk of a 1970s-style US inflationary spiral with the US dollar losing its reserve currency status. 


But the budget deficit as it stands today, given the muted impact on the current account, should not be a major threat to the value of the US dollar.


Jens Søndergaard is a currency analyst at Capital Group. He has 17 years of investment industry experience and has been with Capital Group for 10 years. Earlier in his career at Capital, he worked as an economist covering the Euro area and the UK. Prior to joining Capital, he was a senior European economist at Nomura, a senior economist at the Bank of England and an assistant professor at The Johns Hopkins University. He holds a PhD in economics and a master’s degree in foreign service from Georgetown University. Jens is based in London.

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Macro Brief
United States
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