US Dollar Plunges to Worst Start Since 1973 Amid Trump's Trade Policies

Strategic Insights -

The US dollar has kicked off the year on a sour note, plummeting more than 10% in the first half of 2025, marking its worst start since the 1973 Bretton Woods system collapse. Donald Trump's trade and economic policies have taken a toll on the currency, prompting investors to reassess their exposure to the world's dominant currency. Analysts point to Trump's erratic policies, the US's massive borrowing needs, and concerns over the Federal Reserve's independence as contributing factors to the dollar's decline.

Key Takeaways:

  • The dollar index has fallen over 10% in the first half of 2025, its worst start since the end of the gold-backed Bretton Woods system in 1973.
  • The dollar's decline has been attributed to Trump's stop-start tariff war, the US's vast borrowing needs, and worries over the independence of the Federal Reserve.
  • The euro has risen 13% to more than $1.17 as investors focus on growth risks in the world's biggest economy, while demand for safe assets such as German bonds has increased.
  • Investors have begun to hedge more of their dollar exposure, driving the greenback lower, despite no significant threat to the dollar's status as the world's de facto reserve currency.
  • Rising expectations of a more aggressive rate-cutting cycle by the Federal Reserve, urged on by Trump, have driven the dollar lower, with at least five quarter-point cuts expected by the end of next year.

Statistics:

  • The dollar index has fallen 10.3% in the first half of 2025.
  • The euro has risen 13.2% to $1.17 in the same period.
  • The dollar's decline has taken it to its weakest level against rival currencies in more than three years.
  • The S&P 500 has lagged behind European rivals when returns are measured in the same currency, despite reaching record highs.

Sources:

  • Francesco Pesole, FX strategist at ING
  • Andrew Balls, chief investment officer for global fixed income at Pimco
  • Guy Miller at insurance group Zurich
  • Bloomberg
  • Bloomberg Finance LP