Is the depreciation of the US dollar a bitter medicine or a poison that quenches thirst?

In recent years, discussions about “de-dollarization” have become increasingly intense. Some observers interpret the reduction of U.S. Treasury holdings by foreign investors as a signal of the decline of the dollar's status as a global reserve currency and even predict that this will lead to the collapse of the dollar. However, from the perspectives of balance of payments, the Triffin Dilemma, and the “curse” of global reserve currencies, this reduction in foreign capital inflows and relative weakening of the dollar may instead present the most positive structural adjustment opportunity for the U.S. economy in decades. It helps to correct issues such as trade imbalances, industrial hollowing out, and uneven wealth distribution caused by the long-term overvaluation of the dollar.

As of October 2025, data from the U.S. Treasury TIC indicates that foreign holdings of U.S. Treasury securities amount to approximately $9.24 trillion, slightly down from previous peak levels. Among these, the dynamics of holdings by private investors (including hedge funds) and official institutions (such as foreign central banks) show divergence. Private investors mostly hold through offshore centers like the Cayman Islands, while official institutions have shown net selling in certain months. For instance, in October 2025, there was an outflow of $3.73 billion in overall foreign net purchases of long-term securities and other assets, with a significant contribution from the net selling part by official institutions. This aligns with the “$6.1 billion sell-off” mentioned in the transcript, which may refer to specific months or cumulative data, but the overall trend shows that the proportion of foreign holdings has decreased from a peak of 34% in 2012 to the current level of about 25%-30%.

The long-term massive trade deficit of the United States is the core driver of this phenomenon. In the second quarter of 2025, the U.S. current account deficit shrank to $251.3 billion, an annualized scale of about $1 trillion, mainly driven by a goods trade deficit (with a surplus in services trade). According to the balance of payments accounting identity, the current account deficit must be balanced by a surplus in the capital and financial account. This means that the United States needs to attract foreign capital inflows equivalent to the size of the deficit each year, primarily in the form of foreign purchases of U.S. Treasury bonds, stocks, corporate bonds, and other dollar assets.

The US Dollar Index (DXY) is often viewed as an indicator of the strength or weakness of the dollar, but it only reflects the dollar's exchange rate against a basket of major currencies and does not capture changes in the dollar's purchasing power concerning real assets like gold. Since the collapse of the Bretton Woods system in 1971, which ended the gold standard, the dollar has significantly depreciated against gold, with gold prices soaring relative to the dollar. This reflects a decline in the actual purchasing power of the dollar. Although the DXY has been strong during certain periods (around 105 in 2023), the dollar is still severely overvalued according to the International Monetary Fund's (IMF) Purchasing Power Parity (PPP) assessment. Recent data suggests that as of early 2025, the dollar is overvalued by about 10%-20%, far exceeding the levels prior to the Plaza Accord in 1985 (when the DXY reached 160, indicating an even greater overvaluation).

The root of the overvaluation of the dollar lies in its status as a global reserve currency. Foreign central banks and investors have an “inelastic demand” for dollar assets; they are unwilling to hold interest-free cash dollars and prefer interest-bearing assets, such as government bonds. This forces the United States to run fiscal deficits to issue more debt to meet demand, creating the “global reserve currency curse.” As described by the Triffin dilemma, when a country's currency serves as a reserve currency, it must export liquidity to the world through trade deficits, but this can undermine domestic confidence and lead to long-term imbalances.

The negative impact of this imbalance on the U.S. economy is profound. First, the overvaluation of the dollar has reduced the competitiveness of U.S. exports, leading to the hollowing out of manufacturing. Since 1982, the U.S. trade deficit has continued to expand, with industries moving to low-cost countries (such as China, whose currency is severely undervalued on a PPP basis, making exports cheaper). This has directly hollowed out middle-class jobs, and the manufacturing boom of the 1950s and 1970s has not been replicated. Second, the large influx of foreign capital into financial assets has fueled bubbles in the stock and bond markets. The ratio of the S&P 500 index to GDP has risen significantly since the 1980s, while during the same period, government debt/GDP has increased from 35% to 119%. Foreign net purchases of U.S. stocks have reached trillions of dollars, with the top 1% of the wealthy being the main beneficiaries, whose wealth has grown far outpacing GDP growth, leading to increased wealth inequality.

The increase in globalization and immigration further expands the labor supply, suppressing wage growth. Although GDP grows at an average annual rate of 2%-4%, average hourly wage growth lags behind, forming a “K-shaped economy”: financial assets and top wealth surge, while ordinary workers are crushed. The share of labor income has significantly declined, with the U.S. net international investment position (NIIP) at -95% of GDP, a record low. This means the U.S. has lost some sovereignty—if foreign entities sell off government bonds, it could drive up yields and force policy concessions (such as early tariff adjustments).

However, the process of de-dollarization may reverse this situation. If foreign entities reduce their holdings of US assets, leading to a capital account deficit or a smaller surplus, it will balance the current account and prompt the dollar to depreciate closer to its PPP fair value. This is not the “death” of the dollar, but rather an adjustment towards fair valuation. Historically, after the Plaza Accord in 1985, the DXY depreciated by 46%, restoring the competitiveness of US exports and partially reviving manufacturing. If a similar “Marrakesh Agreement” were to occur, the DXY might further decline to the 50-70 level.

The benefits of a moderate devaluation of the dollar are evident: exports become more competitive, trade deficits shrink, manufacturing returns, and middle-class jobs are created. Industrial revitalization will enhance wage growth and narrow the wealth gap. At the same time, reducing dependence on foreign capital will improve national security—currently, 90% of defense components rely on supply chains from rival countries, with similar situations in critical areas like rare earths, semiconductors, and pharmaceuticals. While de-dollarization may temporarily raise yields, it will help achieve sustainable growth in the long run and avoid the trap of hyper-financialization.

Of course, this adjustment will not happen overnight. In the short term, foreign sell-offs may trigger market volatility, such as rising yields in certain months of 2025. But from a structural perspective, this could be a turning point for the U.S. to break free from the curse of reserve currency status and return to an economy dominated by the real sector. The trends of BRICS countries promoting trade in local currencies and central banks increasing gold holdings accelerate this process, but the dollar's dominance is unlikely to be shaken in the short term. The key is that if U.S. policies encourage re-industrialization (such as tariff protection for domestic industries), this “bomb” could turn into an opportunity.

Pessimists view the sell-off as a signal of a dollar crisis, worrying about hyperinflation or a debt crisis; optimists believe this is a necessary correction, similar to the strong recovery of the U.S. economy after the Plaza Accord. Mainstream economists (such as the IMF) acknowledge the issue of the dollar being overvalued, but emphasize gradual adjustments. Institutions like Standard Chartered warn that de-dollarization is “real but slow” and will not abruptly change dollar hegemony. Overall, evidence suggests that: the foreign reduction of U.S. Treasury holdings is not the end of the U.S. economy, but rather helps the U.S. correct its decades-long economic imbalance.