Published on Feb 2, 2026 • Updated on Oct 31, 2026
This article was written by Adem Tumerkan
Content Strategist, Dunham | 2025 ThinkAdvisor Luminaries Award Winner | 2026 Wealthies Finalist, Thought Leader of the Year | Macroeconomics, markets, geopolitics & global trends
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Have you heard of the term “dollar shortage” or the "dollar gap"?
It refers to a scenario where foreign countries lack U.S. dollars in their reserves to conduct international trade effectively.
Simply put, a dollar shortage occurs when a country's USD outflows exceed its inflows. This can happen if it pays more dollars for imports than it earns from exports or has higher international dollar obligations (such as dollar debts).
And this is a big deal because the U.S. dollar is the global reserve currency – meaning the dollar’s status is a stable currency, making it widely used for pricing assets - and all countries and companies will accept dollars. After all, they know they can use those dollars to buy from anyone else.
| Pressure | How it creates a dollar squeeze | Who is most exposed |
|---|---|---|
| Local currency weakens against the dollar | Borrowers need more local currency to buy the dollars required for payments | Companies and governments with unhedged dollar debt |
| Dollar interest rates rise | New borrowing, refinancing, and floating-rate debt can become more expensive | Borrowers refinancing soon or paying variable interest rates |
| Foreign investors pull back | Capital inflows fall and access to new dollar funding weakens | Economies dependent on external financing |
| Dollar payments exceed available receipts and financing | Import bills and debt payments strain available dollar resources | Borrowers with limited liquid dollar assets or reliable dollar income |
| Short-term funding fails to roll over | Dollar obligations come due before replacement financing is secured | Banks and investors relying on short-term dollar borrowing or FX swaps |
The U.S. dollar accounts for roughly 57% of global foreign exchange reserves as of Q2-2026, easily outpacing runners-up like the euro, the yen, and the British pound.
This is a big reason why the U.S. must always run a deficit – because it must net-export dollars.
Or said another way, if the U.S. doesn’t buy more than it sells abroad, how would anyone get the dollars they need?
I wrote about this in depth back in December 2023 – “The U.S. Dollar: An Exorbitant Privilege? More Like An Exorbitant Burden – Here’s Why“ – to touch on this paradox.
But the key point here is that the global economy constantly needs access to dollars.
Simple, right?
Well, this is where things get tricky. . .
Many institutions around the world have significant dollar-denominated debts.
Meaning a company or country issues “dollar bonds” – aka borrows in US dollars rather than their domestic currency (for example, Mexico may issue bonds denominated in U.S. dollars instead of the Peso because it’s more attractive to investors and less volatile).
Why is this a problem? Because the borrowing country – let’s keep using Mexico as an example here – must constantly get dollars to repay the dollar debts. And if they can’t export enough to bring in dollars, they have a higher risk of defaulting on their dollar loans.
And this is becoming a huge problem with so many nations loaded up with U.S. dollar debt. . .
According to the International Monetary Fund, nearly 70 countries were listed under its low-income-country debt sustainability framework as of September 30, 2026. Of those with published assessments, 10 were already in debt distress, 22 were at high risk, 26 were at moderate risk, and just 9 were at low risk.
That means 32 countries were either already in debt distress or at high risk of entering it.
And here’s where debt pressure can become a dollar problem.
For countries and companies that owe dollars, earning enough local currency is only part of the job. They still need to obtain the dollars required to make those payments (aka a debt owed in dollars generally has to be repaid in dollars - not Mexican pesos, Turkish liras, Brazilian reais, etc).
That can mean drawing down reserves, using export earnings, or borrowing more. But when those sources come under pressure at the same time - the noose gets tighter.
Put simply, owing dollars is one thing. Getting them when the bill comes due is another.
And a stronger dollar only makes that job even harder. . .
Federal Reserve monetary tightening can worsen a global dollar shortage by restricting offshore liquidity and driving up the value of the U.S. dollar. When the Fed hikes rates, it triggers capital flight toward U.S. assets, making dollars scarce and expensive abroad. While this acute squeeze intensified with recent rate hikes, the structural trend actually began building over a decade ago.
For instance, since the Federal Reserve began raising interest rates, the dollar has continued to get stronger relative to foreign currencies.
But this trend really started back in 2014 when the Federal Reserve began tapering back its aggressive easing post-2008 and started talking about raising rates.
To put this into perspective, since summer 2014, the U.S. dollar index (the DXY) is up 25%.
So why does this matter?
Because when the dollar gets stronger, it means the cost of those getting those dollars increases for foreign countries.
In fact, evidence shows that when a country’s currency weakens against the dollar, the cost of imports from the United States rises, putting upward pressure on prices. For instance, on average, a 10% dollar appreciation translates into a 1% increase in inflation abroad3.
Why? Well, since commodities - like oil, wheat, and metals - are priced in dollars, then a stronger dollar raises the costs of these goods.
Making matters worse, because food and energy expenditures constitute a larger share of consumption in emerging economies, increases in dollar-priced commodities significantly raise their cost of living.
Put simply, higher rates lead to:
But this is particularly problematic for governments and companies in emerging economies, as most of their borrowing is in dollars (as I mentioned above).
Here’s a quick history lesson: after the 2008 Global Financial Crisis, these emerging economies saw strong capital inflows after above-average growth and interest rates attracted investors (and money). Thus, as a result, borrowing in emerging economies grew, with over 80% of this debt denominated4 in foreign currency - primarily U.S. dollars.
So, countries or corporations that borrowed in U.S. dollars are now stuck dealing with an increased cost of getting those very dollars they need to pay back the debt.
Lovely, right?
Making matters worse, the pandemic caused a sharp reversal in capital flows as U.S. interest rates rose, leading to credit rating downgrades in many emerging economies.
Thus, those with high levels of external debt relative to foreign exchange (dollar) reserves experienced large-scale capital outflows and dramatic currency depreciations – amplifying the dollar shortage.
A dollar drought can come from more than higher Federal Reserve rates or market cycles.
Washington can also create one deliberately.
How? Because global trade clears through American banks, the U.S. government controls the primary tollbooths for international finance. When Washington cuts off access, foreign economies suffocate quickly.
For example - look at Iran.
Over the past decade, the U.S. Treasury used sanctions to cut Iranian banks off from international payment networks and target foreign firms handling Tehran's oil revenue. This helped cause an acute shortage of dollars inside the country. And without access to dollars to settle foreign accounts, Iran’s rial plunged to record lows, domestic inflation surged, and companies struggled to pay for basic imports.
Then there’s Venezuela.
In January 2019, Washington sanctioned its state oil company, PDVSA - a major source of the country’s dollars. The measures froze assets under U.S. jurisdiction and largely barred Americans and U.S. companies from doing business with it (with some exceptions). Thus, Washington squeezed a key channel bringing foreign currency into the country. This meant fewer buyers for Venezuelan oil, steeper discounts, and higher shipping costs. That left fewer dollars flowing into Venezuela - and less money available to pay for imports - making an already weak economy even more anemic.
Put simply, you don’t always need higher interest rates to create a dollar squeeze. You can also restrict access.
Therefore, a reserve currency status is more than an economic advantage. It gives Washington the power to run a financial blockade without firing a single shot.
The global dollar shortage – where foreign nations are struggling to get dollars to repay their liabilities and imports – seems to be getting worse.
Remember, an ever-growing amount of dollar debt globally means an ever larger amount of dollars needed to service it.
Thus, while many in the mainstream financial media talk about the dollar-debt problem, I believe it’s more important to discuss the servicing ability of that debt – aka the global dollar shortage.
The strong dollar is acting like a wrecking ball for emerging economies – crushing borrowing capacity, credit ratings, currencies, capital flows, and imports.
Back in late 2022, the BIS estimated5 that non-banks outside the U.S. and banks headquartered abroad owed roughly $65 trillion in off-balance-sheet dollar payments through foreign-exchange swaps, forwards, and currency swaps. Keep in mind that much of this funding was short-term, meaning borrowers had to secure fresh dollars again and again as payments came due. And if that funding dried up? Well, those dollar payments still had to be made.
Note that the $65 trillion represents payment obligations - not expected losses. Many of these contracts hedge dollar assets. The danger is having to find fresh dollars just as lenders are pulling back.
The global economy will increasingly grow more fragile if this trend persists – which I believe it will.
Of course, if the Fed cuts interest rates, that may take some pressure off emerging markets and their currencies.
But the big question is: can many last until then?
As always, this is just some food for thought.
What is a dollar shortage? A dollar shortage happens when countries, companies, or financial institutions can’t get enough U.S. dollars to pay for imports, repay dollar debts, or refinance loans. It’s a shortage of accessible funding, not physical dollar bills. Dollars may be plentiful elsewhere, even as borrowers with payments due struggle to obtain them on affordable terms.
What causes a dollar shortage? A dollar shortage develops when dollar payment needs exceed available income, liquid assets, and financing. Falling export earnings, money leaving a country, lenders pulling back, and sanctions can limit access. Pressure builds when lenders won’t renew short-term loans. A stronger dollar can also raise repayment costs for borrowers who earn income in another currency.
How do higher U.S. interest rates affect a dollar shortage? Higher U.S. interest rates can make dollar borrowing more expensive and draw investment toward dollar assets. If the dollar also strengthens, borrowers earning local currency need more of it to make dollar payments. The pressure depends on loan terms, protection against currency changes, and access to funding, especially when existing loans come due.
What happens to a country when it runs short of dollars? A dollar shortage can make imports harder to finance and dollar debts harder to repay. A weaker local currency can raise import prices, while reduced lending can squeeze businesses and households. Severe shortages can lead to import limits, debt restructuring, or default. Reliable dollar earnings, accessible reserves, and less foreign-currency debt can help a country absorb the pressure.
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