Key takeout
- Investors continue to witness a decline following the dollar’s most significant drop in six months, a rarity in decades.
- Distrust in the dollar is prompting many to sell it in favor of gold and other significant currencies.
- Even with the Chinese central bank backing the yuan, the dollar isn’t expected to relinquish its dominance any time soon.
The first half of 2025 has shown the dollar’s worst performance in over three decades—since 1991, in fact. A combination of limited US fiscal strength and erratic trade policies has led to this downturn, raising questions about how low global reserve currencies might actually go. With the ongoing trade wars and fiscal issues unresolved, concerns only deepen.
The US Dollar Index, which tracks the dollar’s performance against the six most traded currencies globally, lost nearly 11% in the first half of 2025. If we narrow it down, this period stands out as the worst since the oil crisis in 1973 and matches the dire times from 1991.
“International investors are becoming increasingly wary of the dollar, especially as public debt climbs and the White House promotes its easy money tactics. Moreover, terms like ‘revenge tax’ and ‘Mar-a-lago contracts’ unsettle these investors,” comments Jan Viebig, Chief Investment Officer of Oddo BHF.
Indeed, both central banks and individual investors are looking towards alternatives like the euro and gold. “China’s central banks are reportedly buying gold to move away from the US dollar,” notes Monica Kalay, research director at Morningstar. “This trend clearly indicates that gold is gaining popularity again, seen as a hedge against inflation. The interest in gold during 2025 is influenced by a mix of macroeconomic uncertainty, geopolitical events, and concerns about inflation risks,” she adds.
Will the dollar continue to decline?
Hong Chen, who leads Morningstar’s bond and currency surveys, thinks the dollar has more room to fall against other currencies. “In the short run, the dollar may encounter resistance due to slowing US economic growth and an increasing focus on fiscal and monetary policies that favor growth abroad,” she explains.
“Even with solid economic indicators showing robust labor markets, we’re still cautious about the dollar’s future. Our prediction is that import rates in the US are set to rise,” she adds.
Criticism directed at Federal Reserve Chairman Jerome Powell from President Donald Trump has shaken confidence in the Fed’s independence and its ability to manage inflation. The financial markets seem more prepared for potential cuts in interest rates, and low rates traditionally weaken currencies. “So far, Trump’s policies indicate a less aggressive interest rate reduction by the Fed, but the rising risk of growth may push the Fed to implement more cuts than previously thought. Unsustainable fiscal policies and high levels of uncertainty could lead to further declines of the dollar,” she elaborates.
Peter Kinsella, the global forex strategy chief at UBP, also sees the dollar’s slide continuing. “Wider investment themes and a hedging shift regarding dollar exposure could lead to gradual depreciation of the greenback,” he states.
Euro vs. US Dollar outlook
The euro has emerged as one of the strongest currencies during the first half of 2025 and has even topped the G10 rankings in June. “The ECB is certainly pleased with this ‘Global Euro’ moment,” wrote Chris Turner, ING’s global chief, in a July 1 note.
ING analysts commented, “Should the market choose to readjust the price premium on the US dollar that it gained over recent months, we could see the EUR-USD nearing 1.20.”
Kinsella believes the EUR-USD pair can climb even higher. “Hedging needs combined with challenges in the US labor markets could easily pressure the dollar further and lift EuroUSD to greater heights. The build-up in long euro positions has been evident lately, but they remain below where they were prioritized in 2023,” he says.
Wewel projects the EUR-USD exchange rate could reach 1.20 by late 2025, and potentially 1.25 by the third quarter of 2026.
Sticky inflation supports the UK pound for now
Since the start of the year, the dollar has weakened over 8% against the British pound. Kinsella mentions, “While GBP-USD is up, it mainly reflects the ongoing weakness of the dollar, rather than any unique valuation of the pound itself.”
The pound may also face political uncertainties. Speculation regarding the British Prime Minister’s future has created jitters about fiscal policy commitments and integration plans.
The increase in long-term interest rates is likely to limit the government’s fiscal options and could prompt tax hikes in the upcoming budget. “These factors may further hinder the UK’s growth, which has notably slowed in Q2,” Wewel comments.
Yet, a significant inflation rise in April, along with another strong figure, could constrain the BoE’s ability to cut rates. On a more positive note, Gov. Bailey has hinted that the Bank of England might slow its pace of quantitative tightening and ease some pressures from the market.
USD-JPY in Limbo
The yen has seen considerable appreciation since the year’s start, but it has recently plateaued, possibly reflecting domestic growth challenges and stalled trade talks with the US.
“It’s unlikely any trade deal between the US and Japan will be reached before the end of July elections in Japan,” Wewel observed. The current Japanese government faces political hurdles that complicate tariff negotiations. Nevertheless, a strengthened yen could emerge as part of a potential trade agreement between the two nations.
Wewel is hopeful the Bank of Japan will maintain its policy stance until negotiations with the US are completed. Attractive long-term yields on Japanese government bonds may lead local investors to bring foreign assets back home, but structural issues might hinder a complete recovery to earlier levels.
Kinsella shares that “The downside risk seems limited. The BOJ’s hesitant approach to raising rates suggests investors might pull back from long JPY positions. Overall, Kinsella expects USD-JPY to trade within the 144-147 range.”
China’s ambition for the Yuan raises it against the dollar
The overarching theme of dollar weakness also holds. “Political divides and US security issues make American assets less appealing to Chinese investors, thereby boosting their preference for domestic investments,” Viebig states.
JPMorgan anticipates the yuan could strengthen to 7.15 by the end of 2025 from its current 7.17, and further to 7.10 by mid-2026, easing trade tensions and indicating a move away from reliance on the dollar.
Furthermore, a report by the US Federal Reserve highlights that China’s robust domestic banking has reduced dollar lending to other emerging markets, possibly lowering their borrowing costs.
“We believe USD-CNY will likely navigate at the lower end of its recent range. The two-year yield spread is tightening, adding to the likelihood of challenging the 7.15 level,” according to analysts.
World reserve currency will not disappear in one night
Chen from Morningstar advises against hastily declaring the dollar’s decline. “In the long run, significant outflows from official accounts and foreign investments haven’t been fully seen yet. However, shifts away from dollar assets could happen over several years, particularly amid growing geopolitical and policy-related uncertainties,” she notes.
