Key Takeaways
- After the dollar’s steepest half-year drop in decades, investors see continued declines ahead.
- Receding confidence in the dollar is driving investors to sell dollars and buy gold and other major currencies.
- The dollar is unlikely to lose its dominance quickly, even as China’s central bank boosts the yuan.
The first six months of 2025 marked the worst half-year performance for the dollar since 1991, as mounting doubts about US fiscal strength and capricious trade policy chipped away at the currency’s status as a safe haven. The sharp decline has raised the question of how much further the world’s reserve currency might fall with neither the trade war nor US fiscal anxiety resolved.
The US Dollar Index, which measures the value of the greenback against the world’s six most traded currencies, has lost almost 11% of its value during the first half of 2025. When only comparing first-half periods, the start to this year marked the worst performance since the 1973 oil crisis and the worst half-year since the second half of 1991.
“International investors have become skeptical of the dollar as public debt continues to rise and the White House aggressively pushes for a policy of ‘easy money.’ In addition, concepts such as ‘revenge tax’ or the ‘Mar-a-Lago Agreement’ make international investors uncomfortable,” explains ODDO BHF Chief Investment Officer Jan Viebig.
Indeed, central banks and private investors have been diversifying into other currencies and assets, such as the euro and gold. “Central banks, particularly in China, have been aggressively buying gold to diversify away from the US dollar,” says Morningstar research director Monika Calay, citing net assets in gold exchange-traded products that have reached $326 billion. “This is a clear sign that investors are again turning to gold, driven by its long-standing reputation as an inflation hedge. Gold’s 2025 inflows are being fueled by macroeconomic and geopolitical uncertainty, central bank diversification, and investor anxiety around inflation risk,” she says.
Will the Dollar Keep Falling?
Hong Cheng, Morningstar’s head of fixed income and currency research, sees room for further declines in the value of the dollar against other major currencies. “In the near term, we believe the dollar may face continued headwinds due to a moderation in US economic growth and the relative shift toward more growth-supportive fiscal and monetary policies abroad,” she says.
“While economic data have remained robust, with a resilient labor market and soft data on activity, we remain cautious on the dollar. In our view, the effective tariff rate on US imports should rise from here, which in combination with the weaker dollar should drive prices higher and weigh on domestic consumption,” explains Claudio Wewel, FX strategist at J. Safra Sarasin.
As US President Donald Trump’s criticism of Federal Reserve Chair Jerome Powell erodes confidence in the Federal Reserve’s autonomy and as inflation moderates, markets have grown more certain that the Fed will eventually pivot to rate cuts. Lower interest rates generally weaken a currency. “So far, Trump’s policy agenda implies that the Fed’s rate cut trajectory will be shallow, but increasing growth risks could force the Fed to deliver more cuts than markets currently price, which should add to the near-term dollar headwinds,” says Wewel. Unsustainable fiscal moves and a high level of policy uncertainty may initiate further financial outflows from the US that would push the dollar lower.
Peter Kinsella, global head of forex strategy at UBP, also anticipates ongoing dollar weakening. “The wider themes of asset allocation decisions and hedging USD-denominated exposures are likely to place modest depreciation pressures on the greenback,” he says, referring to a dynamic wherein non-US investors look to offset potential swings in assets using strategies that involve selling the US dollar.
The Outlook for the Euro vs. the US Dollar
The euro has been one of the strongest currencies in the first half of 2025 and the top-performing G10 currency in June. “The ECB is no doubt welcoming this ‘global euro’ moment, but [it] also must be acknowledging that there is an awful lot of work to be done to attract global funds out of the US,” wrote Chris Turner, global head of markets at ING, in a note published July 1. “Here, we would say progress on joint EU debt would be the single biggest game changer.”
According to ING analysts: “If markets decide to price back the amount of USD risk premium that prevailed in the past two months, EUR-USD should trade very close to 1.20.”
Kinsella also believes that the EUR-USD pair may rise further. “Ongoing hedging requirements and any nascent weakness in the US labor market will weigh on the USD, which can easily push the EUR-USD toward higher levels. We note that long EUR positioning has increased in recent weeks, though it remains well below levels which prevailed in 2023,” he says.
Wewel forecasts that the EUR-USD exchange rate could reach 1.20 by the end of 2025 and go even further to 1.25 in the third quarter of 2026.
Sticky Inflation Supports the British Pound for Now
Since the beginning of the year, the dollar has lost more than 8% against the British pound. According to Kinsella, “The GBP-USD will edge higher, although this will reflect ongoing USD weakness, rather than idiosyncratic GBP appreciation.”
Sterling could also face some political risk. The pound whipsawed amid speculation over the UK Chancellor’s position, fueling uncertainty about fiscal policy and the government’s willingness to stick to its fiscal consolidation plans.
The rise in longer-term interest rates is set to reduce the government’s fiscal options, raising the prospect of tax increases in the autumn budget. “This should additionally weigh on beleaguered UK growth, which has slowed meaningfully in Q2,” says Wewel.
“Yet the sharp rise in April inflation and another strong print in May limit the BoE’s room for policy rate cuts. On a more positive note, Governor Bailey indicated that the BoE may slow down its pace of quantitative tightening, reducing its outright sales of gilts, which should ease pressures to some extent. Overall, we expect the pound to soften moderately against the euro, while it should continue to grind higher against the dollar,” Wewel adds.
USD-JPY in Limbo
The Japanese yen has appreciated meaningfully since the start of the year, though this has stalled in recent weeks, likely reflecting domestic growth headwinds and a lack of progress in Japan’s trade negotiations with the United States.
“A US-Japan trade deal is unlikely to be agreed upon before the Japanese elections in the end of July,” says Wewel. “Japan’s current administration won’t be able to make easy concessions, as tariff negotiations have become a major point of contention in domestic politics. Yet a stronger yen could be part of an eventual trade deal between Japan and the US, implying a near-term upside risk for the currency.”
Wewel expects the Bank of Japan to keep monetary policy on hold until the country has negotiated a trade deal with the US. Attractive long-term Japanese government-bond yields could prompt Japanese investors to repatriate foreign assets, which would be a further tailwind for the yen. Yet the currency may struggle to recover to prepandemic levels, given various structural challenges.
According to Kinsella, “Downside risks are likely to be limited. The BoJ’s apparent reluctance to raise rates means that investors will likely move to reduce long JPY positioning, which may weigh on the yen, or at least prevent short-term appreciation pressure.” Overall, Kinsella expects the USD-JPY trading at levels of between 144 and 147.
China’s Ambitions for the Yuan Boost It Against the Dollar
The general arguments for dollar weakness also apply to the yuan. “Political polarization and US security concerns make US assets less attractive to Chinese investors and reinforce the preference for domestic investment,” says Viebig.
JPMorgan expects the Chinese yuan to strengthen to 7.15 against the dollar by the end of 2025 from 7.17 today, and further to 7.10 by mid-2026, citing easing trade and tariff tension and a global shift away from the US dollar.
Moreover, in another step toward encouraging global investors to use the yuan, strongly state-aligned Chinese banks have reduced their dollar lending to other emerging-market economies, increasing lending in yuan, partly due to lower lending costs, according to analysis published in May by the US Federal Reserve.
“We believe the USD-CNY will continue to trade at the lower end of its recent ranges. Two-year yield spreads have contracted further, giving continued downside risks to levels of 7.15. We suspect that any material downside will reflect the USD leg of the pair. The People’s Bank of China is unlikely to want ongoing CNY appreciation, given low domestic inflation dynamics,” says Kinsella.
A Global Reserve Currency Doesn’t Go Away Overnight
Morningstar’s Cheng cautions against hasty pronouncements of the dollar’s fall from relevance: “Over the longer run, while we have not yet observed substantial outflows from official accounts and foreign investors, the likelihood of a structural reallocation away from US dollar assets has increased, particularly amid rising geopolitical and policy-related uncertainties. That said, any meaningful impact on the dollar’s role as the dominant global reserve currency is likely to unfold over a multiyear horizon, given the lack of viable alternatives.”
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