Trump-Era Policies Undermine Dollar as It Posts Worst First Half Since 1973

In the first half of 2025, the U.S. dollar index recorded a sharp decline of 10.8%, marking its worst start to a year since 1973, when the collapse of the Bretton Woods system led to a 14.8% drop. The index, which measures the dollar’s performance against a basket of six major currencies including the euro, pound, and yen, also posted its weakest six-month performance since 2009. The decline is attributed to the effects of Donald Trump’s trade and economic policies, which have led global investors to reassess their exposure to the dollar.

The euro rose 13% against the dollar to above $1.17, surpassing Wall Street’s earlier forecasts of parity. According to ING foreign exchange strategist Francesco Pesole, the dollar has become the scapegoat of Trump’s erratic second-term policies, which include volatile tariff measures, large-scale borrowing, and concerns over the Federal Reserve’s independence. On Monday, the dollar fell a further 0.6% as the U.S. Senate prepared to vote on amendments to Trump’s "Great American Act," a legislative package projected to increase U.S. debt by $3.2 trillion over the next decade, sparking selloffs in the U.S. Treasury market.

Initial market forecasts that Trump’s trade policies would benefit the dollar by harming foreign economies and spurring domestic inflation have proven inaccurate. The euro’s appreciation reflects shifting investor focus toward growth risks in the U.S. and increased demand for safe assets such as German bonds. Pimco’s Global Chief Investment Officer for Fixed Income, Andrew Balls, noted that Trump’s April announcement of “reciprocal tariffs” has disrupted expectations and added pressure on the dollar.

Growing anticipation of rate cuts from the Federal Reserve, under pressure from Trump, has also contributed to the dollar’s decline. Futures markets imply at least five 25-basis-point rate cuts by the end of next year. While U.S. equities reached record highs on Monday, the weakening dollar has led to underperformance of the S&P 500 when measured in other currencies compared to European counterparts.

Institutional investors, including pension funds and central banks, are increasingly seeking to reduce their exposure to dollar-denominated assets. Andrew Balls emphasized that while the dollar’s role as the world’s primary reserve currency is not currently under threat, a significant depreciation remains plausible. The rise in currency hedging by foreign investors has intensified downward pressure on the dollar, a trend also noted by ING’s Pesole, who highlighted the growing demand for foreign exchange protection as a key reason the dollar has not mirrored the rally in U.S. equities.