Year-end review of the foreign exchange market: The retreat of the US dollar's "unipolar" dominance, the emergence of a multipolar currency order

Since the beginning of this year, the US Dollar Index has shown a downward trend overall. In the first half of the year, the index plummeted all the way, although there was a slight rebound later on, the overall trend remained weak. The movement of the US Dollar Index is influenced by factors such as US monetary policy, reflecting changes in global investors' attitudes towards US dollar assets. With increasing policy uncertainty, fiscal constraints strengthening, and volatility in US dollar assets increasing, the "privileged halo" historically associated with the US dollar is being revalued, and its trend change is having an impact on the international financial system and global economic landscape. At the same time, monetary policies of various countries are shifting from coordination to differentiation and independence. The US dollar has historically been dominant, but now the international monetary system is moving towards multipolarity, with multiple central banks pursuing different interest rate expectations and currency fluctuations, significantly impacting the US dollar and other major currencies. This year, as the US dollar has been on a downward trend, multiple potential risks are gradually surfacing. The US dollar's "unipolar" status in the international monetary system is also being challenged. The US dollar's share in global reserve currencies has been continuously declining. According to data from the International Monetary Fund (IMF), as of the end of the second quarter of 2025, the US dollar's share in disclosed currency composition of foreign exchange reserves globally has dropped from 57.79% at the end of the previous quarter to 56.32%, marking a new low in 30 years, with the share continuously below 60% for 11 consecutive quarters. The President of the European Central Bank, Christine Lagarde, also stated in June of this year that due to changes in the composition of global reserve currencies and investor adjustments to asset allocation, the dominant position of the US dollar in international foreign exchange reserves is "no longer so certain." Former Chief Economist of the IMF, Raghuram Rajan, has bluntly stated that challenges to the US dollar's dominance in the global economy are unprecedented, ranging from weakening the independence of the Federal Reserve, violating international commitments, to other countries actively constructing alternative cross-border payment systems, and the "privilege" of the US dollar's dominance in the global economy is facing unprecedented challenges. Fabio Panetta, a member of the Executive Board of the European Central Bank and Governor of the Bank of Italy, also stated that the international monetary system may transition from the dominance of the US dollar to a coexistence of multiple global currencies. Panetta stated that while the US dollar will still be a key currency, the world "may gradually move towards a more multipolar structure," which could lead to greater diversification, but if coordination problems arise, it could also intensify volatility and contagion risks. In terms of monetary policy, the Federal Reserve and other global central banks are showing divergence, with several developed countries experiencing differentiation due to policy differences, while developing countries face pressures from two-way capital flows, leading to increased exchange rate volatility. The overall dynamic of the foreign exchange market is intensifying and reshaping the landscape. By the end of the year, the Federal Reserve and the Bank of England have successively lowered interest rates, while the European Central Bank has remained unchanged and even discussed raising interest rates, suggesting that path of various countries in 2026 may further diverge. US Dollar and Major Currencies: Decline of the Dominant, Rivalry of the Many US Dollar: Downward Trend In 2025, the US Dollar Index has experienced a "parabolic" decline, plummeting from its strong high at the beginning of the year to a multi-year low, sparking discussions about the "decay of the US dollar." The US Dollar has experienced declines against all major currencies, with the US Dollar Index showing a "high retracement, range-bound" trend. According to Bloomberg, the US Dollar Index has fallen by 9.6%, marking the largest annual decline in nearly 9 years. Specifically, at the beginning of the year, the US Dollar Index briefly exceeded the 110 mark, but it was short-lived, and it quickly fell from 110 points. In February, data showing a rebound in inflation and increasing signals of economic slowdown, discussions about "stagflation" risks were reignited, putting pressure on the US Dollar and beginning a downward trend. Entering the second quarter, amid the impact of the US's imposition of tariffs on its global trading partners, global uncertainties increased, compounded by concerns about "stagflation" in the US economy, leading to a series of declines in the US Dollar. Market tremors caused by the "tit-for-tat tariffs" policy, resulted in the US Dollar falling by over 4% in April. Ultimately, in the first half of the year, the US Dollar Index saw a decline of 10.8%, marking the worst performance over the same period since 1973. In the second half of the year, market sentiments have slightly eased, the US Dollar's "decline has narrowed," shifting to a range-bound consolidation. The weakness of the US dollar is the result of multiple factors, including both short-term cyclical reasons and deep-seated structural changes. Impact of Tariff Policies: The Aftereffects of 'Tit-for-Tat' This year, the storm of tariffs initiated by President Trump has swept through the world, with global investors' changing attitudes toward US dollar assets closely influencing the movement of the US Dollar Index. In April 2025, the introduction of "tit-for-tat" tariffs significantly weakened global investors' confidence in US dollar assets as a "safe haven." The tariffs triggered concerns about economic growth prospects and inflation, prompting the withdrawal of funds from US dollar assets. Financial Uncertainties: A Struggle for Stability Amid uncertainties, stringent fiscal constraints, and heightened volatility in US dollar assets, long-held assumptions about the US dollar's "hegemony" are being questioned and recalibrated, reshaping global economic dynamics. Future outlook factors As the US dollar weakens, multiple potential risks are expected to gradually emerge, challenging the US dollar's "unipolar" position in the international monetary system. Christina Lagarde, President of the European Central Bank, acknowledged the dynamic shift in the composition of global reserve currencies and the transformation in investors' attitudes toward American investments. The impact of destabilizing US fiscal and monetary policies, alongside scaling volatility in American assets, is fast eroding the "privilege" historically associated with the US dollar. As these shifts continue to evolve, the US dollar's wavering influence is reshaping narratives around the international financial system and the global economic landscape. Amid these transformative changes, national monetary policies are transitioning from cohesiveness towards discernment and independence. Historically, the US dollar has held a preeminent status, though the world's monetary system is steering towards a multipolar development, where several currencies play prominent roles. This multi-currency paradigm is marking a critical juncture as the global market navigates through evolving financial landscapes. Currency Policy Divergence: Redefining Macro Trends In 2026, global markets witnessed ongoing shifts in major currency trends against the weakening US dollar. This shift is underpinned by a range of volatile factors including a dynamic interplay of fiscal policy dynamics, liquidity constraints, and policy uncertainty. Looking ahead, methodically crafted policy responses would be necessary in recalibrating the global financial order. As markets delicately maneuver through regional financial shifts and policy overhauls, script-wise strategizing