The Long-Term Implications of S&P's Stable U.S. Credit Rating for Dollar Assets and Fiscal Sustainability

The U.S. dollar has long been the bedrock of global finance, but cracks in its foundation are widening. Despite S&P Global Ratings maintaining the U.S. credit rating at AA+ with a stable outlook as of August 2025, the structural fiscal pressures facing the nation—soaring deficits, aging demographics, and rising interest costs—pose a quiet but profound threat to the long-term appeal of USD-denominated assets. For investors, the question is no longer whether the U.S. can sustain its fiscal trajectory, but how these pressures will reshape capital flows and asset valuations in a world increasingly skeptical of American exceptionalism.

Structural Pressures: A Perfect Storm of Debt and Demographics

The Congressional Budget Office (CBO) paints a stark picture: by 2035, the U.S. federal deficit is projected to reach $2.7 trillion (6.1% of GDP), with public debt climbing to 118% of GDP. This surge is driven by two forces: entitlement spending and interest costs. Social Security and Medicare, which together account for nearly half of federal outlays, are set to balloon as the population ages. Meanwhile, net interest payments—now growing at 6.5% annually—are set to consume a significant portion of federal revenues, crowding out spending on infrastructure, education, and innovation.

The CBO also forecasts a slowdown in economic growth to 1.8% annually through 2035, far below the 2.3% average of the past decade. This slower growth, combined with a debt-to-GDP ratio approaching 156% by 2055 under current policies, raises critical questions about the U.S.'s ability to service its debt without triggering a fiscal crisis. Yet S&P's stable rating persists, hinging on the dollar's reserve currency status and the Federal Reserve's ability to manage inflation.

The Paradox of Stability: Why Investors Still Flock to Treasuries

S&P's rationale for maintaining the AA+ rating hinges on three pillars:
1. The Dollar's Unique Role: As the world's primary reserve currency, the U.S. dollar remains indispensable for global trade and finance. Even as fiscal risks mount, demand for Treasuries persists due to their unmatched liquidity and the lack of viable alternatives.
2. Tariff Revenues as a Buffer: Recent trade policies have boosted effective tariff rates to 18%, generating revenue that offsets some fiscal strain. S&P views this as a temporary but meaningful cushion.
3. Monetary Policy Credibility: The Federal Reserve's track record of controlling inflation and stabilizing markets continues to underpin confidence, even as political pressures on the central bank grow.

However, this stability is increasingly at odds with investor behavior. In 2025, U.S. stocks, bonds, and the dollar all declined simultaneously—a rare event signaling a loss of trust in the U.S. as the sole anchor of global capital. Foreign investors, particularly from Asia, are hedging less against U.S. equities and diversifying into German Bunds, Japanese government bonds, and even Chinese yuan-denominated assets. The dollar's overvaluation, which has persisted for years, is now unwinding, with long-term models predicting a 10%–20% decline against the euro and yen over the next decade.

The Investor's Dilemma: Diversification in a Multipolar World

For investors, the implications are clear: the U.S. remains a critical asset class, but its dominance is no longer a given. The erosion of the U.S. AAA rating (now fully realized with Moody's downgrade in May 2025) has accelerated a shift toward intentional diversification. Key strategies include:
- Currency Hedging: With the dollar's relative strength in question, investors are increasingly hedging U.S. equity exposure against euro and yen fluctuations.
- Regional Diversification: Emerging markets and European economies are gaining traction as alternatives to U.S. equities, particularly in sectors like renewable energy and AI.
- Short-Duration Bonds: As term premia rise in U.S. Treasuries, investors are favoring shorter-maturity bonds to mitigate interest rate risk.

China's growing role in global finance adds another layer of complexity. While the yuan has not yet displaced the dollar, the PBOC's swap lines and cross-border trade settlements are creating a more multipolar system. Investors must now weigh not only fiscal risks but also geopolitical ones, as the U.S. dollar's role as a neutral currency is increasingly challenged by its use in geopolitical enforcement.

The Road Ahead: Policy Reforms or Fiscal Collapse?

S&P's stable outlook assumes that U.S. policymakers will eventually address structural imbalances through fiscal consolidation or growth-enhancing reforms. However, the political landscape remains gridlocked, with entitlement programs and tax cuts showing little sign of adjustment. Without credible reforms, the U.S. risks a scenario where rising debt servicing costs force a choice between higher inflation, higher taxes, or a weaker dollar.

For now, the U.S. Treasury market remains resilient, with daily auctions continuing smoothly. But history shows that markets often react to risks long before they materialize. Investors who ignore the growing disconnect between S&P's rating and the underlying fiscal reality may find themselves exposed to a sudden revaluation of U.S. assets.

Conclusion: A New Era of Prudence

The U.S. dollar's reign as the global reserve currency is far from over, but its dominance is being reshaped by structural pressures and shifting investor sentiment. S&P's stable rating offers a veneer of confidence, but the cracks beneath the surface—aging demographics, rising debt, and policy uncertainty—are undeniable. For investors, the path forward lies in prudent diversification, a nuanced understanding of currency dynamics, and a willingness to challenge the assumption that U.S. assets are immune to global shifts.

As the world moves toward a more multipolar financial system, the era of the U.S. as the sole capital market anchor is ending. The question for investors is not whether to hold U.S. assets, but how to balance them with alternatives that reflect the evolving landscape of global finance.