What is the expected trend for the US dollar and why?

• A. The dollar is expected to weaken because the debt-to-GDP ratio is over 100 percent and repayment pressure will push the dollar lower.
• B. The dollar is expected to strengthen due to higher interest rates.
• C. The dollar is expected to remain flat due to stable fiscal policy.
• D. The dollar will become volatile with no clear trend.

Answer: (A)

Debt sustainability and the risk involved in rolling over government debt shape currency values. When the debt-to-GDP ratio is over 100%, investors become more focused on whether the government can service and refinance that debt without creating large fiscal shocks. That concern can dampen demand for the country’s assets and reduce confidence in the currency, pushing it lower as investors seek safer or higher-yielding alternatives. Refinancing pressure—large upcoming debt needs and potential higher costs—can amplify these worries, making the currency more likely to weaken rather than strengthen. While higher interest rates can sometimes buoy a currency by attracting capital, in this scenario the burden of heavy debt and rollover risk tends to weigh more on the dollar than on its benefits from rate differentials. Options suggesting a flat or volatile path assume more stable conditions than the described debt dynamics imply, so the described downward trend best fits the given context.