The U.S. dollar is experiencing its steepest first-half decline in over half a century, falling more than 10% in the first six months of 2025 — its worst start to the year since the dissolution of the Bretton Woods system in 1973. As reported by the Financial Times, the sharp drop comes amid rising concerns over President Donald Trump’s trade policies, surging debt levels, and the perceived erosion of the Federal Reserve’s independence.
The dollar index — which measures the greenback against a basket of major currencies including the euro, yen, and pound — has slumped amid growing investor anxiety over the direction of U.S. economic policy. ING FX strategist Francesco Pesole described the dollar as “the whipping boy of Trump 2.0’s erratic policies,” citing an unpredictable tariff agenda, ballooning fiscal deficits, and mixed signals on interest rates.
Trump’s latest tax bill, currently undergoing Senate amendments, is projected to add $3.2 trillion to U.S. debt over the next decade. The resulting concerns over fiscal sustainability have triggered a pullback from U.S. Treasuries, contributing further to the dollar’s fall. Monday saw the currency slip an additional 0.2%.
Contrary to earlier predictions that Trump’s aggressive trade stance would bolster the dollar by harming foreign economies, the euro has surged 13% this year, climbing above $1.17. Investors have shifted their focus toward economic risks in the U.S. itself, while seeking safer havens in assets such as German government bonds.
“There was a shock in terms of liberation day, in terms of the US policy framework,” said Andrew Balls, Chief Investment Officer for global fixed income at Pimco, referencing Trump’s April announcement of “reciprocal tariffs.” While Balls does not foresee an immediate threat to the dollar’s status as the global reserve currency, he acknowledged a clear trend of global investors moving to hedge dollar exposure — a move that exerts additional downward pressure.
Market expectations have also tilted heavily toward interest rate cuts by the Federal Reserve, with futures markets implying at least five quarter-point reductions by the end of 2026. This dovish outlook — encouraged by the Trump administration — has paradoxically buoyed U.S. equities while weakening the dollar, causing U.S. indices like the S&P 500 to underperform international counterparts when adjusted for currency.
Large institutional investors, including pension funds and central banks, are reevaluating their exposure to dollar-denominated assets. “Foreign investors are requiring greater FX hedging for dollar-denominated assets,” Pesole noted, “and that has been another factor preventing the dollar from following the U.S. equity rebound.”
Amid these shifts, gold prices have soared to record highs, driven by sustained central bank demand and broader concerns about the dollar’s purchasing power.
While some analysts believe the dollar’s sharp drop may soon stabilize — with Guy Miller of Zurich Insurance suggesting “a weaker dollar has become a crowded trade” — the scale and speed of the decline have left investors grappling with a new era of dollar volatility.
The Financial Times emphasizes that although the dollar’s reserve currency status remains intact, the first half of 2025 marks a historic turning point in market sentiment toward the U.S. economic outlook and policy trajectory.
