US Dollar Faces Unprecedented Decline Amid Policy Shifts and Global Market Reactions

US Dollar Experiences Steepest Decline Since 1973

In the first half of 2025, the US dollar has experienced a significant decline, falling 10.8% against a basket of six major currencies. This marks its steepest drop since 1973. The downturn is largely attributed to President Donald Trump’s trade and economic strategies, including erratic tariff policies, increased borrowing, and concerns about the Federal Reserve’s independence, which have shaken investor confidence. The dollar’s weakening defied earlier predictions that the US economy would be resilient to the trade war compared to other regions. Instead, currencies like the euro have surged as investors seek stability elsewhere. The dollar also faced downward pressure due to expectations of aggressive interest rate cuts by the Federal Reserve—prompted by Trump—to support economic growth. These cuts have boosted US equities but left the dollar lagging behind in global returns. Additionally, large investors and central banks are increasingly hedging their dollar exposure and shifting to safer assets like German bonds and gold. Although the dollar remains the global reserve currency, its current instability is causing a reevaluation of its reliability as a safe-haven asset. Some analysts expect the decline to stabilize, citing an overabundance of bearish positions against the dollar.

Global Markets React to Dollar’s Decline

The weakening of the US dollar has had ripple effects across global markets. Gold surged 25%, while global stocks reached record highs and borrowing costs fell, despite intense market swings beneath the surface. Trump’s expansive fiscal plan and renewed trade conflicts have weakened investor confidence in US assets, prompting a notable rotation into emerging markets and other currencies such as the euro, yen, and Swiss franc. Further geopolitical factors, including the US scaling back European military support and the rearmament of NATO allies, spurred a 70% rally in European defense stocks. The Russian ruble and several emerging market currencies, like Ghana’s cedi and Eastern European currencies, noted impressive gains. Conversely, the Argentinian peso and Turkish lira suffered declines. Meanwhile, oil, copper, and precious metals like silver and platinum saw notable price swings or gains. With Trump’s fiscal bill and global trade ceasefire deadlines looming in July, markets may face continued instability in the second half of the year.

Central Bankers Weigh In on Dollar’s Dominance

Central bankers gathered at an annual conference in Sintra, Portugal, indicated that any major challenge to the US dollar’s status as the dominant global reserve currency remains distant. Despite concerns arising from US President Donald Trump’s unpredictable economic, trade, and security policies, the dollar still accounts for 58% of global reserves—well above the euro’s 20%. European Central Bank President Christine Lagarde suggested 2025 could be viewed as a pivotal year potentially favoring the euro, but emphasized that significant change would require time, reform, and effort. Bank of Japan Governor Kazuo Ueda and Bank of England Governor Andrew Bailey echoed this sentiment, citing the need for structural reforms and a reliable supply of safe assets, respectively. Bank of Korea Governor Rhee Chang-yong acknowledged increasing discussion about diversification away from the dollar but noted that central banks were still largely retaining their dollar holdings while exploring hedging strategies. Lagarde also emphasized that for the euro to strengthen its global role, Europe must deepen its capital markets, bolster its legal structure, and commit to open trade coupled with security capabilities.

As the US dollar continues to navigate these turbulent waters, market participants and policymakers alike are closely monitoring developments to assess the long-term implications for global financial stability.