US Dollar has worst start since 1973 - key reasons behind the stunning slide
Dollar Index Drops Over 10% in 2025
The dollar index, which measures the currency's strength against a basket of six others, which includes the pound, euro and yen, has dropped over 10% so far this year, reported Financial Times. It is the worst start to the year since the end of the gold-backed Bretton Woods system, as per the report.
Donald Trump's Tariff Wars and Debt Concerns Weigh on US Dollar
An FX strategist at ING, Francesco Pesole, explained that, 'The dollar has become the whipping boy of Trump 2.0's erratic policies,' as quoted in the report. He even pointed out at Trump's stop-start tariff war, the US's vast borrowing needs and worries about the independence of the Federal Reserve had undermined the appeal of the dollar as a safe haven for investors, as quoted by the Financial Times.
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The currency was down 0.2% on Monday as the US Senate had prepared to start voting on amendments to Trump's 'big, beautiful' tax bill, which is expected to add $3.2 trillion to the US debt pile over the coming decade and has fuelled concerns over the sustainability of Washington's borrowings, sparking an exodus from the US Treasury market, as reported by the Financial Times.
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The US dollar's massive fall marks its worst first half of the year since a 15% decline in 1973 and the weakest showing over any six-month period since 2009, according to the report.
Chief investment officer for global fixed income at bond group Pimco, Andrew Balls, pointed out to the US president's 'Liberation Day' tariffs he announced in April, saying, 'You had a shock in terms of liberation day, in terms of the US policy framework,' as quoted in the report.
Balls highlighted that there was no significant threat to the dollar's status as the world's de facto reserve currency, but that 'doesn't mean that you can't have a significant weakening in the US dollar', as quoted by Financial Times. He even pointed out the shift among global investors to hedge more of their dollar exposure, an activity which itself drives the greenback lower, as per the report.
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Expectations of Fed Rate Cuts
Another reason pushing the dollar lower this year is due to the increasing expectations that the Fed will cut rates more aggressively to support the US economy, which Trump has constantly been urging, according to the Financial Times. Futures contracts show that at least five quarter-point cuts are expected by the end of next year, according to the report.
Increased Hedging Prevents Dollar Rally
While, ING's Pesole also pointed out that, 'Foreign investors are requiring greater FX hedging for dollar-denominated assets, and that has been another factor preventing the dollar from following the US equity rebound, as quoted by the Financial Times.
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Analysts Predict Slower Decline Ahead
Chief market strategist at insurance group Zurich, Guy Miller, predicted that, 'A weaker dollar has become a crowded trade, and I suspect the pace of decline will slow," as quoted in the report.
FAQs
Why is the US dollar falling so sharply right now?
Mainly because of Trump's unpredictable trade policies, rising US debt, and expectations that the Federal Reserve will cut interest rates.
How bad is this drop compared to history?
It's the worst start to a year since 1973 and the biggest six-month drop since 2009.
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