The US dollar has had its worst half-year in five decades, reflecting its most pronounced first-half decline in value since 1973, when President Richard Nixon was in office. The currency is down more than 10% against a basket of major currencies for the year to date, sliding 13.85% against the euro alone.
Emerging markets (EM), including South Africa, have also felt the impact. The rand has appreciated by over 6% against the dollar this year, despite lacklustre domestic fundamentals. Similar gains have been seen in other high-yielding EM currencies, supported by attractive real bond yields and a partial rotation out of dollar assets.
The question this raises for many investors and economists is whether this is the start of a long-term structural shift or a short-term aberration. Per the chart below, the dollar is depicted against a basket of developed-market peers with 100 being the starting level in 1973:
- The dollar is trading near levels last seen in April 2022
- Is far from the strongest levels of close at 115 in September of that same year
- Is about 10% stronger than the weak levels of July 2021
Testing its safe-haven status
For decades, the US dollar has been regarded as a safe haven during times of crisis, even when the US itself was at the centre of the upheaval. After the September 11 attacks, during the 2008 Global Financial Crisis, and in the early days of the COVID-19 pandemic, capital flowed to the perceived safety of dollar-denominated assets.
This pattern did not hold true during the first half of 2025. The escalation of tensions in the Middle East and a US airstrike on targets in Iran, for example, did not significantly boost the strength of the dollar. Likewise, when investors sold off equities in response to US President Donald Trump’s “Liberation Day” tariffs, they did not flock to the dollar.
Policy uncertainty unnerves markets
So, what has changed? The short answer is that Trump has unnerved markets with his stewardship of the US economy. Under Trump’s leadership, US economic management has appeared erratic and even chaotic to outside observers. His on-again, off-again tariffs on major trading partners are a case in point.
While tariffs would intuitively be expected to boost the greenback’s value by reducing demand for foreign imports, they have instead clouded the outlook for the US economy and created policy uncertainty. This has sent some investors looking elsewhere in the world for more stable alternatives.
Another reason behind the US dollar’s decline lies in a loss of faith in the Federal Government’s ability to bring its national debt and government deficits under control. The package of expansionary spending and deep tax cuts in the One Big Beautiful Bill Act (OBBBA) is expected to exacerbate both of these and contribute towards short- and medium-term dollar weakness. Indeed, Moody’s recent downgrade of the US credit outlook reflects growing angst about the unpredictability of America’s political and policy framework.
In addition, Trump is a keen advocate for lower interest rates. Current Fed Chairman Jerome Powell has held firm on his gradual rate cutting path, despite increasingly scathing criticism from Trump. However, Powell’s tenure ends in May 2026, and betting markets are suggesting there is a 30% chance that he won’t last the rest of 2025. Markets anticipate that new Fed leadership may be more aligned with Trump’s preference for low interest rates, which would not be supportive of the dollar.
These three factors explain why the US dollar has trended downwards this year, despite a resilient US economy and a volatile geopolitical climate that would usually support dollar strength. The consensus among analysts and economists is that US dollar weakness is likely to persist this year and beyond. A Reuters poll on 2 July found that nearly 80% of FX analysts expect the dollar to remain weak over the coming months, driven by concerns over US debt, tariffs, and the likelihood of rate cuts.
This does not mean that de-dollarisation is underway. The wider trend can instead be described as a slow recalibration. Some governments and institutional investors are beginning to diversify beyond the dollar into assets like the euro, the Swiss franc, gold, and even the Chinese yuan. But they are not rushing to offload their dollars.
The dollar’s unassailable role in the global economy
Even for investors who would want to ditch the dollar, it’s not practical to do so. The dollar holds such a central role in the global economy that it remains irreplaceable in the short- to medium-term. The dollar underpins more than half of global trade, accounts for roughly 60% of international reserves, and anchors about 65% of global debt issuance.
In the first four months of 2025 alone, foreign investors purchased over $450 billion in US Treasuries, pushing total foreign holdings to just over $9 trillion. In total, foreign investors own around 33% of US government debt. This confirms that there is no widespread retreat from the dollar as the global reserve currency.
Over the medium term, economists at institutions like JPMorgan forecast that the dollar could decline by a further 10% to 20% against a basket of major peers. That adjustment would correct what many view as an overvalued dollar. This would not represent a collapse, but a structural weakening.
The base case is for a weaker dollar for as long as Trump is in office. His administration would regard a weaker dollar as a means to make US exports more competitive in the global market. Plus, Trump appears to believe deeply in low interest rates to stimulate demand and to make servicing the federal debt more affordable.
However, investors should bear in mind that the narrative could shift swiftly. Stronger-than-expected performance from the US economy, a resolution of current trade tensions, clear support for Fed independence, or delayed interest rate cuts could all help restore faith in the dollar. The currency has, after all, defied doomsayers before.
We believe that the dollar will remain king for now, but its crown may lose some shine.
