- The U.S. dollar fell about 10–11% in H1 2025 versus major currencies, then rebounded modestly later in the year.
- The slide was driven by tariff-fueled inflation concerns, expected Fed rate cuts, and weaker confidence in U.S. policy credibility.
- Stabilizing inflation, delayed Fed easing, and smaller rate differentials versus other central banks helped the dollar steady in H2.
- For investors, dollar weakness boosts translated returns on non-U.S. assets and elevates the need for currency risk management amid potential further depreciation.
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The dollar’s dramatic slide in the first half of 2025—around 10-11% decline measured by the U.S. Dollar Index (DXY) against other major currencies—signifies both cyclical swings and emerging structural headwinds for the currency. Two central themes emerge: (a) shifting expectations regarding interest rates and inflation, and (b) fading U.S. ‘exceptionalism’ among global investors.
On the first front, early-2025 optimism about strong U.S. growth offset some inflation concerns, but the Trump administration’s sweeping tariffs introduced upward inflation pressures and uncertainty. Anticipation of Fed rate cuts amplified the dollar’s fall. Mid-year, financial markets began to reprice expectations: inflation showed signs of stabilizing, and the Fed paused on aggressive easing. This fostered the modest rebound (1-2%) in the second half of the year.
Second, investor behavior has shifted. Global capital flows, both from private and institutional investors, have tilled away from the U.S. where relative valuations, policy risk, and inflation dampen returns. Analysts from Goldman Sachs, J.P. Morgan, and RBC argue that long-term overvaluation based on PPP and trade-weighted real exchange rates suggest the dollar remains exposed to further gradual declines.
Such dynamics carry material implications. A weaker dollar boosts foreign asset returns for U.S. investors when translated back into dollars, but also dampens earnings for U.S. multinationals exporting abroad. Domestic industries reliant on importing inputs benefit, while exporters face compression. Monetary policy and fiscal trajectories—especially ongoing deficits, political uncertainty, and potential erosion of Fed independence—are likely to intensify pressures on the dollar.
Overall, while short-term rebounds are possible in periods of market stress or risk aversion, the prevailing trend appears tilted toward incremental and possibly sustained dollar depreciation through 2026 and into the longer term. Portfolios may need to adjust accordingly.
Supporting Notes
- The U.S. dollar fell roughly 10.7% during the first half of 2025 against a basket of major currencies.
- Since hitting mid-year lows, the dollar recovered by about 1.7%.
- MSCI EAFE Index (developed non-U.S. equities) returned 18.1% in local currency, rising to 28.1% in U.S. dollar terms because of dollar weakness.
- Tariffs announced by President Trump in early 2025 raised inflation expectations and sparked fears of rate cuts, both contributing to early-year dollar weakness.
- After H1, inflation and rate cut expectations stabilized, and other major central banks had already cut rates, reducing their interest differentials relative to the U.S.
- Valuation models (e.g. PPP) show the dollar still overvalued relative to the euro, sterling, yen, etc., supporting potential further depreciation.
- Asset managers like Goldman Sachs, J.P. Morgan, and RBC expect continued dollar weakness in coming quarters, though not without volatility.