The U.S. dollar is facing its steepest first-half drop in over 50 years, with the DXY index down
-10.7% in 1H25. Unlike prior cycles where interest rate differentials drove currency moves, today’s decline stems from
slowing U.S. growth, rising fiscal risks, and shifting global capital flows.
- Policy & Fiscal Uncertainty: Concerns over tariffs, Fed independence, and the $4.1T OBBBA bill have rattled markets. In July, even speculation about Fed Chair Powell’s dismissal sparked a 1.2% intraday drop in the dollar. Deficit worries and policy risks are causing investors to question their heavy exposure to U.S. assets.
- Growth & Rate Expectations: Consensus U.S. growth forecasts were slashed from
2.3% to 1.4% earlier this year. July’s weak jobs report (+73k) has fueled expectations for Fed rate cuts, which could further weigh on the dollar.
- Global Reallocation: Overseas investors are trimming U.S. equity flows, with non-U.S. domiciled ETFs halving their average monthly inflows compared to 2024. At the same time,
European-focused ETFs hit a record $42B in net inflows YTD, signaling a structural shift in global asset allocation.
Despite these pressures, the dollar’s
reserve currency status remains intact, still representing 58% of global reserves and dominating international transactions. However, this does not rule out a
prolonged dollar decline, similar to the 2002–2008 cycle, especially given its elevated starting value.
The Investor Takeaway
Periods of dollar weakness often reward
international equities and local-currency bonds, while U.S. investors must guard against overexposure to USD-denominated assets. History shows that during such cycles,
gold and silver stand out as reliable hedges, protecting purchasing power and providing stability when currencies lose ground. Diversifying into precious metals remains a prudent step in today’s uncertain environment.
Continue Reading:
https://am.jpmorgan.com/us/en/asset-management/adv/insights/market-insights/market-updates/on-the-minds-of-investors/where-is-the-us-dollar-headed-in-2025/
