Dollar Decline Deepens as Euro and Yuan Gain Momentum

Euro Surges on Defense Spending; Dollar Weakens Under Trade Pressure

In May 2025, the foreign exchange landscape is witnessing rapid shifts, with the euro and yuan gaining significant strength while the U.S. dollar faces downward pressure. At the center of this movement is the euro, which has climbed approximately 10% over the past two months. This surge is fueled by the European Union’s €500 billion defense investment, paired with a wave of foreign capital inflows seeking stability outside the United States.

The dollar, meanwhile, is under strain. The U.S. Dollar Index (DXY) has dropped nearly 8% since January, largely driven by softened inflation data and growing investor unease surrounding renewed trade tensions under the Trump administration. According to Business Insider, U.S. equities have seen an exodus of $63 billion from foreign investors in just two months, further weighing down the greenback.

Technical indicators suggest the EUR/USD pair could remain volatile but supported in the 1.1200 to 1.1575 range throughout the month, depending on tariff developments and ECB rate moves.

China Moves to Cool Yuan Rally; Taiwan and Turkey Add Regional Volatility

The Chinese yuan has gained strength in recent weeks, prompting the People’s Bank of China (PBOC) to take interventionist steps to prevent overheating. Authorities have loosened gold import quotas and facilitated forex transactions aimed at easing yuan appreciation, according to Reuters. This strategy aims to absorb market liquidity and redirect speculative flows into commodities rather than the currency itself.

In Taiwan, the rapid appreciation of the New Taiwan Dollar (TWD) has raised alarms, particularly in the life insurance sector, where insurers hold over $750 billion in unhedged foreign bonds. A 10% currency gain could cost these firms up to $20 billion, warns the Financial Times.

Turkey’s lira has been the worst performer this month, plunging over 12% after the arrest of Istanbul Mayor Ekrem İmamoğlu triggered massive protests and central bank intervention. Authorities sold $25 billion in foreign reserves in a failed attempt to stabilize the exchange rate, sending further shockwaves through emerging markets.

Market Outlook: A Shaky Road Ahead for the Greenback

Looking forward, analysts expect continued dollar weakness through the second half of 2025, with some projecting a 15%–20% depreciation over the next few years if trade disruptions persist. The pound, while benefiting modestly from the dollar’s decline, remains capped due to weak UK economic indicators and looming Bank of England rate cuts.

Overall, forex markets remain on edge, with political shocks, fiscal stimulus, and central bank maneuvers reshaping currency dynamics at a pace not seen in years. Traders and businesses alike are watching the next moves from Washington, Brussels, and Beijing to gauge what’s next in this shifting currency landscape.