2025 Mid-Year Dollar Wrap: Worst First-Half Performance Since the 1970s — Is the Slide Set to Continue?

TradingKey - As the Trump administration’s aggressive tariff policies shift from inflation driver to catalyst for falling U.S. exceptionalism and large-scale capital outflows, combined with rising concerns over Federal Reserve independence and growing expectations for rate cuts, the U.S. dollar has plunged more than 10% in the first half of 2025 — far below Wall Street’s expectations at the end of 2024.

The DXY U.S. Dollar Index has now declined for six consecutive months, falling from around 110 at year-end 2024 to below 97 in June. As of June 30, the index stood at 97.09, marking a roughly 11% drop in H1 — the lowest level in nearly three years.

2025 DXY Year-to-Date, Source: TradingView

In addition, the Bloomberg Dollar Index fell 8.8% in the first half of 2025, its worst performance since the index’s creation in 2005. According to Reuters, this could be the largest H1 decline in the dollar’s value since the free-floating exchange rate era began in the early 1970s.

From Strong Dollar Expectations to Dollar Decline

At the end of 2024, economists widely expected that Trump’s mix of tariff hikes abroad and tax cuts at home would reignite inflation and support the Fed’s higher-for-longer interest rate stance — continuing the strong dollar momentum seen in 2024.

Barclays analysts had previously argued that the Trump administration would be pro-dollar, with many major Wall Street banks forecasting an eventual parity between the euro and the dollar (EUR/USD = 1).

However, the scale and unpredictability of Trump’s trade actions have shaken global investor confidence. His frequent policy reversals, the controversial Section 899 asset tax on foreign investors, and the escalating political tension with Fed Chair Powell have all fueled the “Sell America” trend that dominated Q2 2025.

At the end of June, outgoing Bank for International Settlements (BIS) Governor Agustín Carstens warned that U.S.-led trade wars and policy shifts are undermining long-established economic order — placing the global economy at a “pivotal moment.”

De-Dollarization Accelerates

A recent survey by think tank OMFIF, which interviewed 75 central bank reserve managers, found that 70% of respondents said U.S. political developments have reduced their appetite for the dollar — more than double the share from last year's survey.

The U.S. dollar has fallen from its top spot as the most favored currency among central banks, dropping to seventh place in 2025. The biggest beneficiaries of this de-dollarization trend are the euro and the Chinese yuan.

Meanwhile, after central banks added gold to their reserves at record levels in recent years, 40% of surveyed institutions plan to continue buying gold over the next decade.

Fed Independence Under Threat — Who Will Be the Next Chair?

Seema Shah, Chief Global Strategist at Principal Asset Management, noted that the dollar did not benefit from the recent escalation of Middle East tensions — indicating that its traditional safe-haven appeal is weakening.

Looking ahead to the second half of 2025, the key factors influencing the dollar will be the selection process for the next Federal Reserve Chair and ongoing concerns about the Fed’s independence.

Since April, Trump has repeatedly criticized Powell for maintaining high rates, calling him “stupid,” a “stubborn mule,” and “Mr. Late.” Recently, Trump hinted he has narrowed down his shortlist of potential successors to three or four candidates who would likely favor rate cuts.

U.S. Treasury Secretary Scott Bessent has played down speculation about an early replacement, aiming to preserve institutional credibility and market stability.

Shah warned that an official announcement on the next Fed chair could trigger significant market turmoil, once again raising questions about the credibility and autonomy of U.S. institutions — a development investors typically view with concern.

Fiscal Concerns Add Pressure

The Republican-backed “Beautiful Big Bill” has also raised alarms over U.S. fiscal health. Some controversial spending cuts and revenue-raising measures may fall short of offsetting the deficit impact from sweeping tax cuts.

The Congressional Budget Office (CBO) estimates that the Senate version of the bill could add $3.3 trillion to the U.S. deficit over the next decade, including $4.5 trillion in lost revenue and only $1.2 trillion in savings.

Mitsubishi UFJ Financial Group warned that ongoing uncertainty over U.S. fiscal and trade policy would continue to weigh on the greenback — with rising government debt serving as a key drag on the dollar.

Both Morgan Stanley and Société Générale expect the dollar to remain under pressure in the second half of 2025. JPMorgan Chase projected that a gauge of the US currency’s strength could fall another 2% by year-end.