The US dollar registered its worst first-half performance in more than 50 years, collapsing by almost 11%. The currency’s dismal showing was in stark contrast to what had occurred in the financial markets, whether stocks soared to record highs or Treasury yields slid. For some, it is a case of the world dumping US assets. For others, it is a correction in foreign exchange markets.
All Hail the US Dollar
The good old buck has historically been a good old safe-haven asset. Instead, the US Dollar Index (DXY), a measure of the greenback against a weighted basket of currencies, including the British pound and Japanese yen, plummeted by nearly 11% in the first six months of 2025, with a 6% decline in the second quarter.
Former President Richard Nixon oversaw the US dollar's dramatic drop in 1973. At the time, soaring anti-dollar capital outflows, surging price inflation, and the end of the Bretton Woods system fueled the decline of the greenback. Today, the factors have varied, including changes to international trade and concerns about Washington's deteriorating fiscal health.
But why would a conventional asset used in times of turmoil suffer a sharp selloff? It depends on whom you ask. Minneapolis Federal Reserve President Neel Kashkari suggested that it was a signal of global investors shifting away from US-related assets, be it the currency or Treasury securities. Treasury Secretary Scott Bessent recently stated that it is more likely a correction in the financial markets, considering that the buck has been the top-performing currency for the last several years.
Who is right?
When the enormous volatility unfolded in the US bond market in April, speculation arose that China and other foreign markets were aggressively reducing their holdings of Uncle Sam’s debt. The latest Treasury International Capital report shows foreigners did not cause the sharp movements in Treasury yields. In fact, foreign holdings of US debt are hovering at all-time highs.
Additionally, other metrics indicate continued dollar dominance. SWIFT data, for example, illustrates that the US dollar accounts for approximately half of global payments. Statistics from the International Monetary Fund reveal that the buck accounts for nearly two-thirds of worldwide central bank reserves. Even in recent Treasury auction results, foreign investors have been purchasing the majority of the issued bonds.
Put simply, the global appetite for US debt remains fierce.
For the past decade, the US dollar has been one of the top-performing currencies on the world stage. The DXY surged 7% last year. The greenback’s ascent has come at the expense of other currencies across international markets, particularly in Europe and Asia, making goods more expensive to purchase. This year, a sort of rebalancing has taken place.
The euro and Swiss franc, for example, have advanced about 7% on the "europhoria" that has swept global financial markets. The offshore and mainland Chinese yuan have risen about 2% and 3%, respectively, against the greenback. In the aftermath of last year's chaos in Tokyo, the Japanese yen has strengthened 7% against the buck.
But both Kashkari and Bessent can be right simultaneously: Other currencies are appreciating as traders become bullish on the rest of the world. Indeed, the only shock emanating from international currency markets is the speed of the dollar’s decline this year.
Rebound Incoming?
Market watchers suggest that the US dollar may experience a rebound in the second half. So far, in the first week of trading, the DXY has risen 0.5%.
Now, it would take several developments for the chief international reserve currency to pare its double-digit losses. The first, of course, is trade de-escalation and stabilization, with the United States reaching agreements, lowering tariffs, and softening President Donald Trump's trade position. The second would be the Federal Reserve cutting interest rates as tariff-driven inflation does not materialize, which would also bolster economic growth and increase foreign capital investment. Finally, if the US dollar is residing in oversold territory, investors might rotate back to the dollar and other dollar-denominated assets, giving the buck a boost.
Like the tariff-fueled chaos of April, the worst may be over – and this could help reverse the downward pressure on the currency.
Mar-a-Lago Accords
The long-term picture of the US dollar might be different, however, particularly if the Trump administration advances the speculative Mar-a-Lago accords. This is a recent economic theory that emulates the famous Plaza Accords, whereby major US trading partners agreed to depreciate the dollar through a diverse array of domestic policies. Today, economists purport that the president may move forward with a plan to weaken the dollar and strengthen foreign currencies, making US products more competitive in the global marketplace.
Hey, Wall Street, the 1980s called, and it wants its currency policies back.
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