Weakening Dollar

The U.S dollar has seen the biggest first-half drop in half a century, dating back to 1973. The dollar index has fallen roughly 10% in the first two quarters of 2025, reaching its lowest level in over 3 years. A combination of economic policy shifts and waning investor confidence drives this sharp drop.

Why

Monetary Policy Pivot: After aggressive rate hikes in previous years, the Fed has shifted to a more dovish stance. The Fed cut rates in late 2024 and has stopped hikes in 2025. This has removed some advantages that previously supported the dollar. With investors betting on additional rate cuts within the coming months and the president also urging for cuts, U.S yields have fallen, making the dollar less attractive. In comparison, the European Central Bank has kept rates higher for longer and very gradually eased, narrowing the yield gap that favored the dollar.

Trade Policy & Uncertainty: New trade tariffs and geopolitical tension under the current administration have left investors unsettled. In Q1 2025, the U.S announced tariffs on key trading partners such as China and even proposed tariffs on neighbors Mexico and Canada. By June, a deadline for broad tariff measures continued to worry global investors. This erratic trade policy prompted a sell-off in the U.S dollar through worries of an impending trade war. The risk of high import costs has encouraged investors to seek safer and higher returns elsewhere.

Debt and Fiscal Concern: The U.S fiscal outlook has also weighed on the dollar. Large tax cuts and ambitious spending plans, such as The Big Beautiful Bill, are forecasted to add trillions to already high levels of debt. This deficit burden has put pressure on U.S treasuries and raised questions about how sustainable these debt levels are. Currently, the U.S spends roughly 15% of its federal spending budget on interest payments alone. As government bond investors demand higher yields for perceived risk, the prospect of slower growth and credit concerns undermines currency appeal.

Shifting Investor Sentiment: After a decade of U.S exceptionalism, global investors are diversifying away from U.S assets. Europe and emerging markets have been receiving some attention with relatively high growth prospects. The dollar’s slide has fueled popular “carry trades”, with investors borrowing cheaper dollars to invest in high-yielding currencies such as the Rupee or Real. As more funds flow out of U.S dollars into foreign markets, it creates a cycle of weakness. Investor positioning shows negative sentiment, contrary to the optimism of recent years.

Equities and Commodities Effects

Equities: A weaker dollar has a mixed impact on equities. In Q1 and early Q2 of 2025, U.S markets struggled, falling over 10% with major cap tech/growth stocks fueling it. One factor was that foreign investors were pulling back, which had buoyed mega-cap stocks previously. Another factor was the introduction of heavy tariffs, fueling concern. Conversely, other markets performed well. European and other developed countries posted growth of ~7-10% during this period as a cheap U.S dollar boosted returns. But in Q2 2025, sentiment rebounded as lower interest rates and a cheaper dollar, which helps U.S exporters and companies with overseas earnings, contributed to a strong recovery. In late June, both the S&P 500 and Nasdaq Composite climbed to record highs. Overall, weakness initially matched a decline in the market but then helped set the stage for a rally, and financial conditions and sentiment eased.

Commodities: Prices have increased significantly due to the dollar’s slide. Since global commodities are generally priced in USD, a cheaper dollar tends to push prices higher. Gold has seen a strong increase, up 25% since the beginning of the year, trading around $3,330/oz. Investors sought it as an inflation hedge after the dollar lost purchasing power. Other precious metals have also followed suit with double-digit gains. Oil and industrial commodities also saw tailwinds. In Q1, commodities at large jumped roughly 9% aided by tariffs and an OPEC+ decision to tighten supply. Crude oil had a volatile Q2 due to geopolitical events and Middle East conflicts. Overall, oil prices found support from improved demand, with Brent crude hovering in the mid-$60s. Overall commodity prices have increased, benefiting energy and mining stocks, but also feeding into higher input costs in the economy.

What Now

With the dollar index down over 10% in the past 6 months, many wonder if this trend will continue into the second half of the year. Currency cycles often run for years, and some worry that this is a start to a structural downtrend. The U.S’s large trade deficits and rising debt present long-term headwinds that are predicted to persist. If the Fed continues with more rate cuts to support growth, the interest rate differential could continue to dampen the dollar.

Despite this, a rebound can’t be ruled out. The dollar remains the world’s primary reserve currency, and during times of global stress, it often attracts inflows. If economic data outside the U.S. were to deteriorate sharply, such as a slowdown in European growth, investors could return to U.S. assets. Additionally, the steep drop has made other currencies relatively expensive. Foreign central banks like the ECB or the Bank of Japan might respond with their policy easing, which could indirectly support the dollar. There is also a technical element that, after an extreme first-half plunge, the dollar could see a short-term corrective bounce if markets think the sell-off.

Overall

Heading into the second half of the year, the U.S dollar’s strength has faded, a development with significant implications for portfolios and prices worldwide. The weaker dollar has helped lift equities and commodities, but it also reflects underlying concerns about U.S policy and economic direction. Whether the dollar will see a comeback or if it continues a decline will hinge on upcoming monetary and fiscal policy. Now investors watch the Fed, the White House, and international response to gauge the dollar’s moves. In the meantime, the first half of the year had been a reminder of how currency fortunes can change, and how those echoes across equities and commodities.