Standard Chartered warns: If Trump's policies fail to stimulate economic growth, the dollar may face a "significant" decline next year

When government debt skyrockets while economic growth falters, the fate of the dollar may face a severe blow.

On Wednesday, Standard Chartered Bank stated in a research report that if Trump's policies increase the U.S. debt burden without boosting the economy, the risk of a "significant" decline in the dollar next year will increase.

Standard Chartered further pointed out that U.S. government debt and external liabilities have risen in tandem in recent years, laying a time bomb for the dollar and U.S. Treasuries. Once foreign investors lose confidence in the U.S.'s long-term borrowing capacity, the consequences could be dire.

Steve Englander, the bank's global G10 foreign exchange research head, mentioned in the report:

The continuously expanding U.S. deficit is reducing national savings while increasing the demand for foreign savings, which directly translates into a higher current account deficit.

The core of this vicious cycle is that maintaining a high current account deficit is itself a gamble, and when Trump's policies fail to boost growth and foreign investor confidence wavers, this gamble could spiral out of control.

The Cost of Ineffective Stimulus Policies

Englander warned:

If tariff and tax policies fail to stimulate growth, foreign creditors will have greater concerns about debt sustainability, which is likely to manifest in the form of risk premiums, either as higher interest rates or a weaker dollar.

In fact, the market has already begun to sense danger. Trump's aggressive tariff policies and their chaotic implementation have put pressure on the dollar and U.S. Treasuries, with some investors starting to question the stability of U.S. assets.

Although Trump has shown a willingness to negotiate on trade policy, investors' attention is shifting to fiscal issues—specifically, how much new debt the trillions of dollars in tax legislation will bring.

The Time Window is Closing

Standard Chartered believes that foreign investors are currently still unwilling to completely sell off these traditional safe-haven assets, as they are waiting to see if Trump's policies can boost growth. If the tax legislation is approved, it may provide some economic benefits this year, but Englander predicts that this boosting effect is likely to fade by mid-2026 or 2027, when concerns about the long-term impacts on growth and debt will resurface.

Even more concerning is that if trade policies remain "erratic," investors will be reluctant to further increase their exposure to the dollar, which could trigger "significant" fluctuations in the dollar. Meanwhile, improvements in growth prospects in other regions will further exacerbate selling pressure.

The Fed's "Limited Ammunition"

In the face of a potential crisis, the Federal Reserve's policy tools may have limited effectiveness. Englander pointed out that the effectiveness of any easing policy may be constrained, and a decline in short-term U.S. Treasury yields may not extend to bond duration.

Although Englander believes that as long as the U.S. government can continue to issue dollar-denominated debt, it will never face bankruptcy risk, he added:

The risk of effective default achieved through inflation could become a substantive risk. If the debt trajectory cannot be flattened, borrowing conditions may become increasingly stringent, and risk premiums will raise the costs of public and private borrowing