The first half of 2025 marked the worst performance for the US dollar since 1973. As the greenback struggles against rising geopolitical tensions, fiscal uncertainty, and shifting global economic policies, investors are left wondering: just how much further will the dollar fall?
The Dollar’s Struggle
In the first six months of 2025, the US Dollar Index, which tracks the greenback against six major global currencies, has dropped nearly 11%. This steep decline has drawn comparisons to the dollar's downturn during the oil crisis of 1973 and the early 1990s recession. What's driving this sharp dip? Experts point to growing concerns about America's fiscal health and unpredictable trade policies, which are eroding confidence in the dollar as a safe haven.
Many international investors have begun to diversify their portfolios away from US assets. As a result, gold and other currencies, particularly the euro, are seeing increased demand. “Rising public debt and ‘easy money’ policies are making investors uneasy about the US dollar,” says Jan Viebig, Chief Investment Officer at ODDO BHF. Meanwhile, China’s central bank has been aggressively buying gold, further signaling a move away from the dollar.
Gold and the Euro: Rising Alternatives
While the dollar falters, gold has emerged as a preferred asset for many central banks and private investors. According to Morningstar’s Monika Calay, “China and other nations have been actively purchasing gold to hedge against potential dollar weakness.” This shift is apparent, as assets in gold exchange-traded products (ETPs) have reached $326 billion. As a hedge against inflation and economic instability, gold has been a tried-and-true safe haven for investors during times of uncertainty.
The euro has also benefitted from the dollar’s decline, with the European currency performing strongly in the first half of 2025. The European Central Bank is no stranger to the rise of the "global euro," yet the challenge remains: how to attract global funds out of the US. ING’s Chris Turner notes, “The success of the euro will largely depend on progress in areas like joint EU debt issuance.” If this happens, the euro could trade as high as 1.20 against the dollar by year-end.
The Dollar’s Continued Downward Pressure
Looking ahead, many experts predict the dollar could continue its downward slide. Morningstar’s Hong Cheng argues that a slowdown in US economic growth and stronger fiscal policies abroad will weigh on the dollar. "Despite a resilient labor market, US economic activity has softened, and we remain cautious on the dollar," Cheng says.
Compounding the issue is the growing speculation that the Federal Reserve may cut interest rates to counteract economic pressures. Historically, rate cuts weaken a currency, and with Trump’s criticisms of the Federal Reserve, many market participants are expecting a more dovish stance from the central bank. This could fuel further dollar declines.
The UK Pound: A Mild Rally Amidst Uncertainty
The British pound has seen a mild recovery against the dollar, with the greenback losing over 8% against sterling in 2025. However, this gain is more a result of the dollar’s weakness rather than any significant strengthening of the pound itself. According to Kinsella, "The GBP-USD will edge higher, but this reflects the broader weakness of the dollar, not a dramatic appreciation of the pound."
Political uncertainties in the UK could still pose risks to the pound, particularly around fiscal policies and the ongoing debate over the government’s approach to fiscal consolidation. However, with inflationary pressures still present in the UK, the Bank of England might find itself limited in its ability to cut rates, further influencing the pound’s outlook.
The Yen: Stalled Yet Strong
Japan’s yen has strengthened in 2025, although its momentum has slowed in recent weeks. The Japanese currency's performance is tied to trade negotiations between Japan and the US, which remain stalled. Wewel explains, “A US-Japan trade deal is unlikely before Japan’s July elections, and political challenges may prevent meaningful concessions on tariffs.”
Despite this, the yen could continue to benefit from Japan's attractive long-term government bond yields, which might encourage domestic investors to bring back foreign assets. However, the yen’s recovery to pre-pandemic levels is unlikely given the structural challenges Japan faces.
The Yuan: China’s Long-Term Strategy
As the dollar weakens, China’s yuan has become a key player in the global financial landscape. JPMorgan predicts the yuan could strengthen to 7.15 against the dollar by the end of 2025, further tightening trade and tariff tensions. Additionally, the Chinese central bank is reducing its dollar-denominated lending to emerging markets, increasing lending in yuan.
The yuan’s rise reflects a broader shift away from the dollar, but Viebig cautions that the yuan’s ascent won’t necessarily signal the immediate fall of the dollar. “We believe the USD-CNY pair will continue to hover at the lower end of its recent range, but a material downside will likely reflect the weakness of the dollar,” he adds.
Will the Dollar’s Reign End Soon?
Despite the dollar’s current struggles, it’s important to remember that the greenback remains the dominant global reserve currency. A sudden loss of its status is unlikely in the short term, as there are few viable alternatives. As Morningstar’s Cheng notes, “Any meaningful change in the dollar’s position will likely unfold over a multi-year horizon.”
The future of the dollar remains uncertain, and global investors will continue to diversify their portfolios in response to economic volatility. As the global financial system evolves, the question remains: just how low can the dollar go?