The US dollar has recorded its worst start to a year in over five decades, dropping by nearly 10% in the first half of 2025 against a basket of major currencies, as per market data released this week. Economists and strategists are warning of a prolonged period of weakness, driven by shifting global interest rate dynamics, geopolitical repositioning, and structural adjustments in the global reserve currency landscape.
Key Highlights
- The US Dollar Index (DXY) fell from 103.2 at the start of January to 92.8 by end-June, marking its steepest six-month decline since 1973, when the Bretton Woods fixed exchange rate system collapsed.
- The greenback has depreciated significantly against all major currencies, including the euro, yen, yuan, and emerging market currencies.
- Federal Reserve’s dovish pivot in April, signalling three rate cuts in 2025 amid slowing growth, triggered broad-based dollar selling.
US Dollar Performance H1 2025
| Currency | Jan 2025 Exchange Rate | Jun 2025 Exchange Rate | % Change |
|---|---|---|---|
| EUR/USD | 1.083 | 1.152 | +6.4 |
| USD/JPY | 148.6 | 137.4 | -7.5 |
| USD/CNY | 7.18 | 6.73 | -6.3 |
| USD/INR | 83.1 | 80.2 | -3.5 |
| USD/BRL | 4.97 | 4.61 | -7.3 |
| DXY | 103.2 | 92.8 | -10.1 |
Reasons Behind The Sharp Decline
- Fed Rate Cuts:
The Federal Reserve’s decision to reduce rates by 75 basis points cumulatively so far in 2025 has narrowed interest rate differentials with other major economies. - US Economic Slowdown:
Recent GDP data showed annualised growth slipping below 1.2% in Q2 2025, raising concerns over economic resilience. - Fiscal Deficit Worries:
The US fiscal deficit has widened to over 6.8% of GDP, fuelling concerns about debt sustainability and dollar confidence. - Global De-Dollarisation Efforts:
Countries such as China, Russia, and members of BRICS+ are increasingly promoting trade settlements in local currencies and alternative payment systems to reduce dependence on the dollar. - Central Bank Diversification:
Global central banks have marginally reduced dollar allocation in their reserves, increasing exposure to gold, euro, and yuan assets.
Economist Perspectives
- Paul Krugman, Nobel Laureate:
“The dollar is experiencing cyclical weakness, but structural shifts in global finance and trade will determine whether this turns into a multi-year downtrend.” - Mohamed El-Erian, Allianz Chief Economic Adviser:
“The combination of Fed easing, fiscal indiscipline, and geopolitical repositioning could lead to a longer-term depreciation trend for the dollar.”
Impact On Global Markets
| Sector | Impact |
|---|---|
| Emerging Market Currencies | Appreciation; reduced dollar debt servicing burden |
| Commodities | Gold and oil prices surged due to weaker dollar |
| US Exports | Competitiveness improved, supporting manufacturing |
| Imports | Costlier for US consumers; may fuel imported inflation |
| Foreign Investments | Reduced attractiveness of US bonds for yield seekers |
Gold prices rallied to an all-time high of $2,640 per ounce in early July, supported by the dollar’s slump and safe-haven demand amidst geopolitical risks in Eastern Europe and West Asia.
Historical Context
The dollar’s worst six-month performance since 1973 mirrors past episodes of deep declines:
- 1985 Plaza Accord: Coordinated devaluation to correct US trade imbalances.
- 2002-2008 Bear Market: Dollar weakened amid twin deficits and rising euro strength.
- 2020 Pandemic Shock: Brief sharp decline before a rapid rebound due to Fed support.
Dollar Index: 50-Year Trend
| Year | Major Decline Driver |
|---|---|
| 1973 | Bretton Woods collapse |
| 1985 | Plaza Accord |
| 2002-2008 | Twin deficits, euro surge |
| 2020 | Pandemic shock |
| 2025 | Fed cuts, de-dollarisation, structural adjustments |
What Lies Ahead
Economists forecast continued weakness in H2 2025, albeit at a moderated pace:
- Fed’s Policy Path:
Two further rate cuts expected by December could sustain bearish pressure on the greenback. - Global Growth Divergence:
Faster economic recoveries in Europe, India, and Asia may keep dollar demand subdued. - Geopolitical Risks:
Any escalation in global conflicts or a sudden shift in US economic data could create short-term dollar rebounds.
Strategic Implications For India
- Positive for rupee stability, easing imported inflation pressures in oil, commodities, and electronics.
- Improved export competitiveness for Indian IT, pharmaceuticals, and textiles in dollar-denominated contracts.
- Boost for forex reserves due to valuation gains from non-dollar assets.
- Enhanced capital inflows into Indian equities and debt as dollar returns remain muted.
Analyst Advisory
- HDFC Bank Treasury:
“Importers should capitalise on current USD/INR levels through forward bookings, while exporters can hedge judiciously to manage volatility risk.” - ICICI Direct FX Research:
“A sustained break below 80 could open further rupee gains towards 79.50 by Q4 if global risk-on sentiment continues.”
Conclusion
The US dollar’s 10% decline in the first half of 2025 marks a historic inflection point in global currency markets. While cyclical drivers such as Fed easing and economic moderation are immediate triggers, the underlying structural changes in global trade, finance, and geopolitical alignments may determine whether this marks the beginning of a prolonged dollar downtrend. Global investors, policymakers, and trade strategists will closely watch upcoming US economic data, Fed policy statements, and emerging market currency interventions to recalibrate their outlook for the world’s most influential reserve currency.
Disclaimer: This news report is for informational purposes only and does not constitute financial, investment, forex trading, or policy advice. Readers are advised to consult certified market strategists, currency experts, and official central bank publications before making any forex or investment decisions based on this report. The publication is not responsible for any decisions taken based on the information presented.
