Where the U.S. Dollar Is Headed and What It Means to You

U.S. Dollar Is HeadedFor the U.S. federal government’s fiscal year, which ends this Tuesday, the Congressional Budget Office (CBO) predicts a budget deficit of $506 billion. (Source: Congressional Budget Office web site, September 26, 2014.)

But just because our annual deficit is declining, that doesn’t mean our national debt is rising by an equal amount.

In fact, between September 20, 2013 and September 20, 2014, the U.S. national debt increased by $1.0 trillion. (Source: Treasury Direct, last accessed September 23, 2014.)

And the government is expected to post budget deficits until at least 2024.

According to a report released by the CBO, the U.S. government’s budget deficits will amount to $7.19 trillion between 2015 and 2024. (Source: Congressional Budget Office, August 27, 2014.) That’s roughly $780 billion a year on average.

Each year the government incurs a budget deficit, it has to borrow money to pay for its expenses and as a result, the national debt increases.

With the national debt now at $17.7 trillion, adding another $7.19 trillion takes the total to $24.89 trillion within 10 years. But as I showed you earlier in this story, government debt is rising at a much faster pace than national debt.

My prediction: a national debt of $34.0 trillion within 10 years.

For the current fiscal year, the U.S. government is estimated to pay $430 billion in interest on the national debt. The Federal Reserve has stated it plans to raise interest rates starting in 2015 and will continue to do so right through to 2017.

According to the CBO, interest payments on the government’s debt will triple within 10 years.

While I’m sure traders are enjoying the recent rally in the U.S. dollar, that rally is simply a product of the Fed’s repeated announcements of higher rates ahead and the continued economic problems in the eurozone. The reality of the matter is that the projected massive increase in the U.S. national debt will have a material impact on the U.S. dollar.

Over the past five years, we have seen central banks around the world reduce the amount of U.S. dollars they hold as their reserve currency. The greater a country’s national debt, the more pressure on its currency. The U.S. will be no different.

The long-term fundamentals for the greenback are poor. Exposure to investments in strong foreign countries (think Canada) is very important for American investors at this juncture.