Why is the US dollar falling by record levels in 2025?

Sell-off linked to unpre­dictable and unfund­ed eco­nom­ic poli­cies which threat­en the safe-haven role of the US dol­lar

The Unit­ed States dol­lar has had its worst first six months of the year since 1973, as Pres­i­dent Don­ald Trump’s eco­nom­ic poli­cies have prompt­ed glob­al investors to sell their green­back hold­ings, threat­en­ing the currency’s “safe-haven” sta­tus.

The dol­lar index, which mea­sures the currency’s strength against a bas­ket of six oth­ers, includ­ing the pound, euro and yen, fell 10.8 per­cent in the first half of 2025.

Pres­i­dent Trump’s stop-start tar­iff war, and his attacks that have led to wor­ries over the inde­pen­dence of the Fed­er­al Reserve, have under­mined the appeal of the dol­lar as a safe bet. Econ­o­mists are also wor­ried about Trump’s “big, beau­ti­ful” tax bill, cur­rent­ly under debate in the US Con­gress.

The land­mark leg­is­la­tion is expect­ed to add tril­lions of dol­lars to the US debt pile over the com­ing decade and has raised con­cerns about the sus­tain­abil­i­ty of Washington’s bor­row­ing, prompt­ing an exo­dus from the US Trea­sury mar­ket.

Mean­while, gold has hit record highs this year, on con­tin­ued buy­ing by cen­tral banks wor­ried about deval­u­a­tion of their dol­lar assets.

What has happened to the dollar?

On April 2, the Trump admin­is­tra­tion unveiled tar­iffs on imports from most coun­tries around the world, dent­ing con­fi­dence in the world’s largest econ­o­my and caus­ing a sell­offin US finan­cial assets.

More than $5 tril­lion was erased from the val­ue of the bench­mark S&P 500 index of shares in the three days after “Lib­er­a­tion Day”, as Trump described the day of his tar­iffs announce­ment. US Trea­suries also saw clear-outs, low­er­ing their price and send­ing debt costs for the US gov­ern­ment sharply high­er.

Faced with a revolt in finan­cial mar­kets, Trump announced a 90-day pause on tar­iffs, except for exports from Chi­na, on April 9. While trade ten­sions with Chi­na – the world’s sec­ond-largest econ­o­my – have since eased, investors remain wary of hold­ing dol­lar-linked assets.

Last month, the Organ­i­sa­tion for Eco­nom­ic Co-oper­a­tion and Devel­op­ment (OECD) announced that it had cut its US growth out­look for this year from 2.2 per­cent in March to just 1.6 per­cent, even as infla­tion has slowed

Look­ing ahead, Repub­li­can lead­ers are try­ing to push through Trump’s One Big Beau­ti­ful Bill Act through Con­gress before July 4. The bill would extend Trump’s 2017 tax cuts, slash health­care and wel­fare spend­ing and increase bor­row­ing.

While some leg­is­la­tors believe it could take until August to pass the bill, the aim would be to raise the bor­row­ing lim­it on the country’s $36.2 tril­lion debt pile. The non-par­ti­san Con­gres­sion­al Bud­get Office said it would raise Fed­er­al debt by $3.3 tril­lion by 2034.

That would sig­nif­i­cant­ly raise the government’s debt-to-GDP (gross domes­tic prod­uct) ratio from 124 per­cent today, rais­ing con­cerns about long-term debt sus­tain­abil­i­ty. Mean­while, annu­al deficits – when state spend­ing exceeds tax rev­enues – would rise to 6.9 per­cent of GDP from about 6.4 per­cent in 2024.

So far, Trump’s attempts to low­er spend­ing through Elon Musk’s Depart­ment of Gov­ern­ment Effi­cien­cy have fall­en short of expec­ta­tions. And though import tar­iffs have raised rev­enue for the gov­ern­ment, they’ve been paid for – in the form of high­er costs – by Amer­i­can con­sumers.

The upshot is that Trump’s unpre­dictable poli­cies, which prompt­ed Moody’s rat­ing agency to strip the US gov­ern­ment of its top cred­it score in May, have slowed US growth prospects this year and dent­ed the demand for its cur­ren­cy.

The dol­lar has also trend­ed down on expec­ta­tions that the Fed­er­al Reserve will cut inter­est rates to sup­port the Unit­ed States’ econ­o­my, urged on by Trump, with two to three reduc­tions expect­ed by the end of this year, accord­ing to lev­els implied by futures con­tracts.

Is the US becoming a ‘less attractive’ destination?

Owing to its dom­i­nance in trade and finance, the dol­lar has been the world’s cur­ren­cy anchor. In the 1980s, for instance, many Gulf coun­tries began peg­ging their cur­ren­cies to the green­back.

Its influ­ence doesn’t stop there. Though the US accounts for one-quar­ter of glob­al GDP, 54 per­cent of world exports were denom­i­nat­ed in dol­lars in 2023, accord­ing to the Atlantic Coun­cil.

Its dom­i­nance in finance is even greater. About 60 per­cent of all bank deposits are denom­i­nat­ed in dol­lars, while near­ly 70 per­cent of inter­na­tion­al bonds are quot­ed in the US cur­ren­cy.

Mean­while, 57 per­cent of the world’s for­eign cur­ren­cy reserves – assets held by cen­tral banks – are held in dol­lars, accord­ing to the IMF.