US dollar index drops 11% in H1 2025: What's ailing the greenback?

Mint

5 hours ago

The US dollar, the most powerful currency in the world, has had a tough period as it has been on a steady declining trend, ever since Donald Trump took office in January 2025. It has ended the last five months in the red and is on track to close the current month lower as well, a rare occurrence for the greenback, which hasn't seen a six-month losing streak in recent decades.
The world's reserve currency has fallen nearly 11% over the past six months against a weighted basket of major currencies. On Thursday, it dropped below the 97 mark, hitting its lowest level since February 2022.
Global demand for the US dollar appears to be weakening, as major central banks and non-US investors are showing less interest in dollar-denominated assets than they did earlier. Recent reports suggest that European institutional investors, especially pension funds and insurers, have reduced their dollar exposure to the lowest levels since 2022.
Meanwhile, China, the second-largest holder of US debt, is rapidly selling Treasuries in a bid to end dollar dominance. Other major Asian central banks are also shifting away from the dollar to add more gold to their forex portfolios'.
This shift in sentiment has been driven, in part, by growing concerns over President Donald Trump's economic policies. While the administration has positioned these measures as a path to renewed prosperity, they have failed to reassure markets. Several of the policies signed and proposed by Trump have received warnings from global institutions and the Federal Reserve itself, citing potential risks to economic growth and inflationary pressures.
The traditional flight to safety, where investors sell off riskier assets and move into US Treasury bonds and dollars during periods of global uncertainty, has come under strain. This long-standing trend is rooted in the perception of the United States as the world's largest and most diversified economy, with a consistent track record of debt repayment and historically high credit ratings.
However, investor sentiment has deteriorated amid concerns over a widening US government debt and a rise in interest payments, with recent estimates suggesting that US debt, which currently sits at $36.21 trillion, may swell toward 134-156% of GDP over the next decade from the current 120% of GDP.
While concerns over widening debt are weighing on investor sentiment, Donald Trump's unorthodox policy measures, such as raising tariffs on imported goods and proposing a massive new spending bill that recently cleared a Senate hurdle, have further dampened market mood.
The sweeping reciprocal tariffs on all major trading partners, currently on hold, have disrupted the global trade order that had been in place since World War II.
Additionally, Trump has undertaken cost-cutting measures that include reducing federal employment and public spending, which have reportedly affected US IT giants, such as Accenture.
He also introduced various new schemes, such as the Gold Card, sometimes referred to as the Trump Card, which gives wealthy foreigners an easier path to US citizenship, which is expected to cost around five million dollars in an aim to increase federal revenue.
Meanwhile, global credit rating agencies have taken note of Trump's recent policy shifts, with Moody's in May downgrading the US sovereign credit rating by one notch to 'Aa1,' citing sustained fiscal deficits and increasing interest burdens, and the agency also shifted its outlook on the US from 'negative' to 'stable,' reflecting the structural fiscal challenges now facing the world's largest economy.
Trump's policies not only dampened the consumer sentiment in the US but also created an unfavorable environment for companies to make future investments, as they are afraid that Trump would make alterations or announce new policies, according to the market experts.
On the other hand, Trump himself prefers a weaker dollar, as he believes it would give US exports a competitive edge in the global market. He had earlier accused several countries of artificially inflating the dollar to make their products cheaper compared to those made in the US.
Apart from the economic concerns, the recent expectations that a larger rate cuts coming in the second half of the 2025 has further added pressure to the dollar. While US federal reserve chair Jerome Powell is awaiting further clarity on the economy before making another rate cut decision, he is reportedly facing increasing pressure from Donald Trump to resume rate cuts in order to accelerate growth.
Although the Fed has largely ignored Trump's public criticism so far, expectations are growing that the president could influence the central bank through informal channels.
Wall Street has been buzzing with speculation about a potential 'shadow chair' — someone Trump might position as a vocal critic of the Fed's current stance until Powell's term ends in May 2026.
On Thursday, traders increased their bets on rate cuts this year, with the probability of three reductions rising to about 60%, up from strong expectations of just two cuts earlier in the week, according to CME Group data.
Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.