Perhaps you've heard of the so-called Dollar Milkshake Theory heard.
In this article, I will take a closer look at what is behind this concept - and whether it is still valid under Donald Trump's policies?
(The article has become much longer than originally planned - if you only want to look at the most important points, just keep an eye out for the 👉"Conclusion" sections. Have fun reading!)
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📍What is the "Dollar Milkshake Theory"?
Imagine that the global economy is a giant milkshake made from the liquidity that central banks have been pumping into the financial system for years. In this analogy, the USA has the thickest straw. The Dollar Milkshake Theory (developed by investor Brent Johnson) essentially states that the USA is sucking up a large part of this global liquidity with its straw, which strengthens the US dollar against other currencies.
🤔Sounds abstract at first, doesn't it?
In concrete terms: since the 2008 financial crisis, central banks have created trillions and trillions of money worldwide. The theory is that as soon as the US Federal Reserve (Fed) raises interest rates (i.e. uses its "straw"), capital from all over the world flows into the dollar zone - the dollar becomes more expensive and other currencies come under pressure.
💸Why should money flow into the USA?
On the one hand, American financial markets are considered a safe haven - liquid markets, strong rule of law, stability - where large investors can park their money.
Secondly, higher interest rates in the USA compared to Europe or Japan attract investors.
According to the milkshake theory, this interplay leads to a vicious circle in favor of the dollar: Dollar strength makes it more expensive for other countries to service their USD-denominated debt, which weakens their economies and drives even more capital into the dollar.
Figuratively speaking, the USA "drinks" the milkshake while the rest of the world suffers a dollar withdrawal.
ℹ️ This idea gained popularity in recent years, especially when the dollar actually gained massively in value - in 2022 the dollar index (DXY) rose to a 20-year high as the Fed aggressively raised interest rates. Many said, "See, the milkshake theory is proving true." But was the whole picture really that simple? Even before Donald Trump became US president (again), there were both staunch supporters of the theory and skeptical voices. Let's take a look at both.
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📍Before Trump: arguments for the theory - and against it
➕Arguments in favor of the milkshake theory before Trump:
- US dollar as the world's reserve currency: The USD is the central lubricant of the global economy. Around 60% of global currency reserves are held in dollars, and a large proportion of international trade invoices are also invoiced in USD. This special position creates a permanent basic demand for dollars - whether for trade, debt or as a safe haven in times of crisis. In times of uncertainty, investors have historically often fled to the dollar and US government bonds because they trusted the USA. This "exorbitant privilege" (as France once called it) provided the USA with extremely favorable financing options. The milkshake theory is based on this: When there is a global crisis or the Fed raises interest rates, capital flows en masse into the dollar, causing its value to rise.
- Interest rate advantage and carry trades: The Fed has been able to raise interest rates much faster and more sharply than other central banks - especially in 2022. Higher interest rates on US bonds drew capital out of Europe and Japan, for example, where interest rates were zero until recently. Investors swapped low-yielding euro and yen bonds for higher-yielding US securities. This interest rate differential (carry trade) supported the dollar, as investors first had to buy dollars in order to exchange them for USD. The expectation: as long as the US offers higher yields with comparable risk, the dollar will outperform.
- Debt in USD outside the USA: Many emerging markets and foreign companies have dollar debt. If the USD becomes more expensive, the cost of servicing this debt increases for them - there is a risk of payment difficulties. According to theory, this risk increases the flight to capital: investors withdraw even more money as a precautionary measure, which further increases the demand for dollars. In other words, the dollar "maelstrom" drains liquidity from the rest of the world and can trigger financial crises there, while becoming ever stronger itself.
➖At the same time, there were already dissenting voices at the time:
- US policy would not tolerate an "excess dollar" forever: An too strong dollar damages the US economy because it makes exports more expensive and imported goods cheaper (which puts pressure on domestic manufacturers). There have already been coordinated interventions in the past when the dollar became overpowering - keyword Plaza Accord in 1985, when the G5 states jointly depressed the dollar because the US trade deficit was exploding. Critics of the milkshake theory argued that politicians would intervene or the Fed would change course to prevent damage to the US economy at the latest when the dollar was under extreme pressure. This argument gained particular weight when Donald Trump was president in 2017-2020: he often railed against a "too strong dollar" and urged the Fed to lower interest rates.
- Question of confidence & alternatives: Other economists - e.g. Ray Dalio - argued that the US would lose economic leadership in the long term and undermine confidence in the dollar through excessive money printing. If the world loses confidence in the US, the dollar could lose its safe-haven role. Fiat money critics even warned of long-term dollar devaluation or inflation because "printing money" is never without consequences. In addition, large economies such as China or the EU are working on at least partially bypassing the dollar - be it by trading in local currencies, setting up their own payment systems or increasing their gold reserves as a hedge.
- In short: The milkshake theory presupposes that there are no real alternatives to the dollar and that the world will always flee to the "safe" USD. But what if other currencies or gold become more attractive? This counter-argument was more of a long-term one, as there was in fact no fully-fledged alternative to the dollar until 2024. But the skeptics warned: The world will not blindly trust the US forever - internal political risks could erode the "strongest foundation".
👉So even before Trump's return to the White House, there were two camps:
One saw the dollar continuing to dominate for the foreseeable future due to a lack of alternatives and even becoming stronger (the "milkshake bulls", so to speak), while the other warned that the soup could quickly go sour if US policy were to squander trust. This is precisely what has come into focus since Trump became president again in 2025.
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📍Trump's comeback: what has changed?
Since Donald Trump's return to office at the beginning of 2025, we have suddenly seen a scenario on the markets that doesn't sound like a milkshake theory at all: the dollar is weakening sharply, while other currencies are gaining. The number one trigger is Trump's own decisions - in particular a new round of protectionist tariff policies.
As soon as the president announced surprisingly high import tariffs in spring 2025, the dollar came under massive selling pressure: investors literally fled the US currency for the euro, yen or franc.
The euro jumped to over $1.14 within a few days - its highest level for three years. The much-noticed dollar index (DXY) slipped below the 100-point mark for the first time since 2022. Such a simultaneous rise of all currencies against the USD is extremely rare and underlines the extent to which confidence has been shaken.
⁉️What's going on?
Well, Trump has destroyed confidence - as the ARD financial expert Angela Göpfert aptly puts it. Indeed, the dollar's status as a "safe haven" is crumbling:
Trump's erratic policies (constant changes of course, tweet announcements, sudden exceptions and then new threats) mean that international investors no longer have any planning security. One way today, one way tomorrow - this feeling makes the dollar riskier. Commerzbank foreign exchange expert Antje Praefcke puts it in a nutshell: "The damage has been done, confidence destroyed." As long as this uncertainty persists, she does not expect the dollar to recover significantly.
In other words, if the USA is no longer perceived as a predictable anchor, capital will flee elsewhere.
🤔What's more, Trump openly wants a weaker dollar.
Unusual?
In fact, US governments have officially pursued a "strong dollar" policy for decades - but Trump is breaking with this.
He sees a weaker domestic currency as an advantage in the trade war: US exports become more competitive and imports more expensive (good for domestic industry), while inflation devalues the gigantic US debt to a certain extent.
Trump's camp therefore even welcomes the current fall in the dollar: according to reports, the targeted devaluation of the dollar is one of the declared goals of his economic policy.
💀However, this is a dangerous balancing act.
Foreign investors are already not only fleeing the dollar, but are also dumping US government bonds - the demand for new US bonds is falling.
The result: instead of falling as usual in times of crisis, yields on US bonds are rising because investors are demanding higher interest rates to compensate for the increased risk. At the end of March 2025, the yield on 10-year Treasuries soared to over 4.5% at times, despite economic concerns. Normally, interest rates fall when there are fears of recession - here the opposite is happening, an alarm signal. One reason is that major investors (from foreign central banks to hedge funds) are dumping US bonds on a large scale, which borders on a "run" on the Treasury market. American government bonds - once the epitome of security - are thus wobbling as an anchor of confidence. Some US lawmakers are already warning that Treasuries could lose their status as a global safe haven if this trend continues.
🤷♂️Trump seems unimpressed at first.
He describes his tariff and dollar policy as a "proven formula" and is publicly optimistic. But behind the scenes, it is dawning even on his team that they are playing with fire. According to reports, Trump's economic advisor Stephen Miran is considering a drastic step that the press has derisively dubbed the "Mar-a-Lago Accord" - in reference to the Plaza Accord of 1985.
The idea: foreign creditors of the USA are to be forced to exchange their US bonds for ultra-long-term (100-year!) securities with a minimum interest rate. In plain language, this would be a forced debt cut through the back door - of course, no country would do this voluntarily. That is why, it is said, pressure is being exerted, such as punitive tariffs or even the withdrawal of US military protection, to force allies to accept this "deal". Unbelievable? - Absolutely. Experts are horrified and call the idea "highly dangerous". Moritz Kraemer from LBBW warns that there is no quicker way to undermine confidence in the dollar once and for all. The US government bond was the safe haven in every past financial crisis - a Mar-a-Lago accord would mine this haven, Kraemer says drastically. The milkshake theory was still based on a trustworthy America; Trump threatens to blow up this foundation single-handedly.
👉Let's summarize:
Under Trump, the dollar is experiencing the opposite of what the milkshake theory originally predicted.
Instead of a dollar shortage, we have a dollar glut - investors are turning their backs on the US.
Gold, the "safe haven of the pre-dollar era", has gained considerably in 2025 - around +23% since the beginning of the year, as central banks and investors are increasingly switching to alternative investments. The US dollar index, on the other hand, has fallen by around 8 % so far in 2025.
This development calls into question the validity of the dollar milkshake theory, at least in the short term.
📉However, the last word has not yet been spoken: if Trump's strategy triggers a global financial crisis, there could ironically be panic buying of dollars again - as paradoxical as it sounds. But we are (still) a long way from that. At the moment, it looks more as if Trump has stirred up the milkshake theory with a huge spoon and made it taste rather bitter.
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📍High inflation and debt: No "painless" way out in sight
📉So Trump has partially achieved his goal of a weaker dollar.
At the same time, however, the USA continues to be plagued by high inflation and record debt - a dangerous mix. In 2022, the US inflation rate soared to over 9% at times (a 40-year high) and will still be above the Fed's 2% target in 2025. Although inflation has fallen recently, Trump's tariff tactics tends to fuel inflation again: More expensive imports mean rising prices for consumers. Economists warn that the new tariffs could increase inflationary pressure in the coming months. At the same time, the falling dollar is further weakening the country's own purchasing power - imported goods such as electronics or raw materials are becoming more expensive in dollars. High inflation and a weak dollar at the same time are a toxic cocktail for the trustworthiness of a currency.
💰Even more threatening are the enormous national debts.
In 2025, the USA will be in debt to the tune of around 37 trillion dollars - higher than ever before. In 2024 alone, the federal government's interest costs amounted to over $1 trillion - more than the entire military expenditure of the USA for the first time! Imagine that: A sizable portion of tax revenue now goes to interest payments alone, and the trend is rising. This mountain of debt has been getting bigger and bigger thanks to years of deficits, tax cuts and pandemic aid. And now, due to a loss of confidence, interest rates are also rising at the long end - a highly dangerous dynamic.
Trump is facing a dilemma:
⁉️Wie tame the debt without crashing the economy?
A "painless" solution is not realistically in sight. Some options and their pitfalls:
- 🍊Continue to muddle along and hope: Trump's approach seems to be to keep debt sustainable through lower interest rates (he wants the Fed to cut sharply in 2025) and growth. However, lower interest rates can drive up inflation again - which supports the desired weakness of the dollar, but hits domestic buyers hard. Moreover, how can the Fed cut interest rates sharply if the government is simultaneously providing an inflationary stimulus by increasing tariffs? This conflict is obvious. Nevertheless, the market is currently betting on several Fed rate cuts within a year due to the risk of recession. But "growth at any price" carries the risk of inflation getting out of control - then you would end up with high inflation and damage to confidence in the dollar.
- 📈Debt reduction through inflation/devaluation: There is a certain appeal in inflating away real debt. 10% inflation for a few years noticeably devalues the debt relative to economic output. This is precisely the aim of Trump's dollar weakening policy. However, this is anything but painless: citizens are footing the bill through a loss of purchasing power and the devaluation of savings. US consumers are already losing wealth as a result of high inflation and the depreciation of the dollar. If there is a complete loss of confidence and the dollar goes into free fall, experts warn that this would result in a massive loss of prosperity for the USA - even high tax cuts would not be able to compensate for this. In a way exports By devaluing the dollar, Trump is also exporting the crisis abroad: a weak dollar may stimulate US exports in the short term, but it shakes the global financial system, which is based on a stable dollar. It would be a Pyrrhic victory in which everyone loses in the end.
- 🏦Save or raise taxes: Theoretically, the US could reduce its deficits - spend less or take in more - in order to dynamically stabilize its debt. However, Trump has already done the opposite in his first term of office (major tax cuts, higher military spending). Saving is politically unpopular, especially if you want to spend trillions at the same time to promote domestic industry (keyword America First 2.0 infrastructure and industrial projects). Without consolidation, however, the refinancing of debt remains a sword of Damocles. Refinancing, which has been so easy up to now, is at risk if the dollar loses its role as the reserve currency. The USA will then no longer be able to borrow unlimited amounts of cheap money - but it must continue to borrow in order to repay old debts. This is where the cat bites its tail.
- 💣Part change to "new system": Extreme proposals such as the aforementioned Mar-a-Lago Accord would amount to a partial debt default and irreparably damage global confidence. Another option being discussed by some: Could the US end up working towards a new monetary order, e.g. by introducing a digital currency or agreements with other major powers? Such considerations are highly speculative and would also not come without pain. A cut in the existing system would cause severe upheaval.
👉We see: There is no miracle cure.
Either the Americans pay (via inflation, austerity policy or, in the worst case, a financial crisis) - or the rest of the world pays (via a dollar dominance crisis, which would hit emerging markets hard, for example, if USD loans suddenly burst).
At the moment, Trump is clearly trying to shift the burden to the outside world by weakening the dollar and putting pressure on creditors. But the pendulum could swing back.
The dollar milkshake theory was in a sense a scenario in which the world pays the bill and the dollar wins. Trump's course turns the tables in the short term: The dollar foots the bill - but whether this will work out in the long term is doubtful.
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📍What does this mean for investors (in Europe)?
Given this area of tension, many in the investment community are asking themselves: how do investors prepare for such an uncertain situation? For European investors, who often diversify globally, a few considerations are important:
- 💸RethinkUSD exposure: In recent years, US equities and a strong dollar have been a source of profit. But with Trump's policies and possible phases of dollar weakness, an unhedged USD exposure could become a risk. European investors would do well to keep an eye on their currency allocation. This does not mean avoiding the dollar completely now - after all, the USD could paradoxically rise again in a crash. But one should not blindly assume that the dollar will remain strong. Currency hedging for USD investments or a slightly higher home currency quota (EUR) can make sense to cushion fluctuations.
- 🪙Gold and real assets as a hedge anchor: 2025 has impressively shown that gold is playing a greater role again. Many central banks are increasing their gold holdings to record levels, and private investors also value gold as a hedge against inflation and crises. Gold has gained significantly in value this year, signaling that confidence in fiat currencies - above all the dollar - is waning. Adding gold (or silver, commodity shares, etc.) to a portfolio can serve as insurance against currency risks. Tangible assets in general (real estate, infrastructure, perhaps also selective cryptocurrencies as "digital gold") are under discussion if the dollar's dominance continues to erode.
💶In Europe, we also have the advantage of having a relatively large currency behind us in the form of the euro.
If the dollar really does lose influence drastically, the euro could gain in importance - although this is more likely due to a lack of alternatives, as Europe's economy has its own challenges.
Nevertheless, for EUR investors, a stronger euro against the USD means that investments in the USA are worth less (calculated in EUR). Conversely, EU companies that sell a lot in USD, for example, will benefit if the dollar does not collapse completely (but be careful: a too strong euro in turn harms the European export industry).
This interplay is complex, so it is worth checking global ETFs or funds in your portfolio: Are they perhaps overweight in US stocks? A rebalancing with a slightly higher proportion of Europe/emerging markets can improve diversification and currency balance.
- 📈Use bonds and interest rates: The rise in interest rates in the USA makes US government bonds attractive at first glance - 10-year Treasuries are yielding handsomely. But beware: if you invest in USD bonds as a euro investor, you also bear the dollar risk. Without currency hedging, a falling dollar could eat up the interest gains. Euro government bonds have lower yields, but no USD worries. A possible compromise: inflation-linked bonds (TIPS) in the USA or inflation-indexed euro bonds to protect against inflation risks. Corporate bonds from quality companies in EUR may also be attractive if the situation in Europe is expected to calm down.
- 📊Adjust equity strategy: US tech stocks benefited for years from low interest rates and global capital inflows. Now we have high interest rates and protectionist disruptions. This tends to argue for a shift into value stocks and sectors that benefit from inflation or domestic focus - e.g. energy, basic materials, possibly defense companies or companies in the infrastructure/construction sector (if Trump launches an investment program in the US). European equities appear cheaply valued by historical standards and could catch up relatively if political risks in the USA continue. Nevertheless, the US economy remains innovative - it would be wrong to write it off completely. Rather, diversification is the trump card: in addition to Nasdaq giants, think about an Asian equity ETF or hold European SMEs in your portfolio.
- 🌍Keep an eye on geopolitics: The dollar issue is also geopolitical. China's renminbi is not yet a serious option as a global currency due to capital controls, but China is expanding its influence (trade agreements in local currencies, e.g. oil transactions in RMB). The EU is also working on projects such as digital euro and independent payment channels. For investors, this means that global allocation should not only focus on the USA. Regions such as Asia or commodity countries could also benefit from a reorganization. However, such investments are also associated with political risks. A broad diversification across different currencies and countries reduces the "all in the dollar" cluster risk.
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👉Conclusion:
The Dollar Milkshake Theory was never meant to be an irrefutable law, but a possible scenario. Trump's current policies are turning this scenario on its head, at least in the short term.
It remains to be seen whether the dollar will really lose its "drink" in the long term or whether it will become a safe haven again in the next crisis. For us investors in Europe, this means remaining flexible.
Old certainties - "always buy USD in a crisis" - may no longer apply in absolute terms. Fundamentals, trust and politics play a greater role than ever for currencies. The dollar will not be dethroned overnight, but it is not untouchable either.
So the motto is: stay alert, diversify and manage risk. In this way, you can sleep soundly even in stormy times - regardless of whether the next milkshake boosts the dollar or dilutes it. In both cases, the following applies: being well informed and broadly positioned is a better way to survive any market phase.
ℹ️ What I am currently doing:
To avoid being caught on the wrong foot if the US dollar depreciates significantly, I made sure some time ago that the direct USD exposure of my portfolio does not exceed 30% (currently approx. 26%).
Gold, silver and corresponding mining stocks currently account for around 10% of my portfolio. Should there be a setback in gold, I plan to increase this position further.
Despite the geopolitical shifts, I do not see the long-term orientation of my portfolio at risk and continue to invest regularly in $VWRL.
In my view, the USA will remain the key growth engine and yield driver of the global economy in the long term.
Bitcoin is highly weighted in my portfolio at 34%. However, given the geopolitical uncertainties, I see this as a long-term opportunity - even if short-term setbacks are possible.
My EUR cash ratio is currently around 20%. I will gradually invest this in the coming years in the event of attractive setbacks.
✅Reading tip:
If you are interested in how to invest in times of a weakening US dollar, I recommend the latest article by momentum investor @epi:
You might also be interested in my other articles:
🆘 Crash-Warnsignale & die beste Strategie: Was sagt uns die Vergangenheit?
📈 When in Doubt, Zoom Out – Chart-Tipps für Langfrist-Investoren
ℹ️ Sources
Dollar Milkshake Theory Explained - The Investor's Podcast
Weltreservewährung: Ruiniert Trump den Dollar und damit die USA?
Trump Has Exposed the Fragility of the Global Dollar System
Dollar Weakens 8% Amid Trump Tariffs, Gold Surges 23%
A Record $1.2 Trillion Interest Payments Are Blowing Up The Federal Budget
#geopolitik
#crypto
#bitcoin
#gold
#silber
#trump
#zölle
#tariffs
#europa
#etfs
