I argue that countries’ dollar-denominated net external debt (dollar debt) helps explain the large differences in risk premia across currencies and how U.S. monetary policy affects the global economy. When the U.S. dollar strengthens, the real value of dollar debt increases, weakening the currencies of countries with large amounts of dollar debt and impeding their consumptions. Because the dollar tends to strengthen in bad times, high-dollar-debt currencies are bad hedges and thus have to offer high risk premia. My empirical findings support this idea. First, dollar debt captures exchange-rate and debt-issuance responses to U.S. monetary policy shocks. Second, dollar debt captures the cross-sectional variation in currency risk premia. I develop a general equilibrium model with financial frictions and currency choice of debt denomination that corroborates my findings.