The collapse of the dollar in 2025: Will the decline deepen in the second half?

The greenback is experiencing its worst moment in nearly four decades. The dollar index has fallen more than 9% since the beginning of 2025, marking the worst start to the year since 1986 and reaching its lowest level in the past three years in June. What explains this structural weakness and what can we expect in the coming months?

First half of the year marked by the free fall of the dollar index

At the start of 2025, the DXY was trading near 105 points. What happened next was an almost uninterrupted plunge that pushed the index below 98 points in April—a level not seen since spring 2022. This erosion reflects a profound shift in market perception of the macroeconomic strength of the United States.

The reasons behind the dollar’s weakening

Four key factors explain why the dollar index has lost so much ground:

1. Expectations of Federal Reserve rate cuts

Inflation data (CPI and PCE) released during the first half suggest that the U.S. central bank could begin an easing strategy before the end of the year. This outlook diminishes the dollar’s appeal relative to other currencies, as it reduces the yield premium that the U.S. traditionally offers over economies like the Eurozone or Japan. Fund managers have started swapping dollars for euros, Swiss francs, and higher-yielding emerging market currencies.

2. Washington’s protectionist shift

The administration announced an aggressive tariff policy on global imports, including a 60% surcharge on Chinese products. This strategy raises fears of a resurgence in inflation and trade retaliation that could weaken demand for Treasury bonds. Market nervousness translated into constant capital outflows: a Bank of America survey revealed that in May, 55% of large funds underweighted the dollar, the most pessimistic level in two decades.

3. Capital flow migrations

Money has flowed into European bonds and especially into local debt in emerging markets, with record inflows of about eighteen billion dollars in June. Investors seek positive real yields outside the U.S., a phenomenon that weakens demand for dollar-denominated assets.

4. The combination of fiscal deficit and geopolitical volatility

A budget deficit approaching 6% of GDP forces the Treasury to issue massive amounts of debt. Simultaneously, tensions in the Middle East offer sporadic defensive boosts, but these are fleeting once the market recognizes that a global crisis would raise global inflation expectations, redirecting attention back to Fed rate cuts.

Technical analysis of the dollar index: What do the charts say?

On the four-hour chart, the DXY remains trapped in a narrow range: support is at 97 points and resistance at 99 points. Each time the index approaches 97, buyers emerge; when it nears 99, sellers appear.

The 20-period moving average (shown in orange) places the index just above, indicating moderate bullish momentum. However, as long as resistance at 99 is not clearly broken, a fundamental trend change is not confirmed.

Bollinger Bands reveal that the price is near the upper band, suggesting limited immediate upside without fresh capital inflows. The RSI stands at 61 out of 100: more buying than selling, but not overbought (above 70). When RSI crossed above 60 in previous attempts, the quote failed to break 99 and retreated.

Key levels to watch:

• True strength: close above 99, next target at 100-100.5
• New weakness: break below 97, opening the door to 96 and the annual low of 95.2

Opposing forces that will shape the second half of 2025

The dollar index faces in the second semester a battle between two contradictory currents:

Downward pressure:

• Expectations of the Federal Reserve cutting rates before year-end
• Perceived economic slowdown
• Large fiscal deficit
• Central banks’ diversification strategies toward other reserves

Technical support:

• Geopolitical risk seeking refuge in the dollar
• Tariff uncertainty
• Liquidity premium in the greenback
• Treasury’s need to place massive bonds

As long as these two factors continue competing—lower rates versus abundant debt—the DXY will remain sensitive to any surprises in inflation data or changes in Washington’s policies.

How the dollar movement impacts other markets

Gold: The relationship is inverse. Every point the dollar index loses, gold prices tend to rise by an average of 1.2%. This reflects that gold, bought in dollars, becomes more accessible to the rest of the world when the currency weakens. Central banks accumulated 1,228 tons in 2024 and another 524 tons between January and April 2025, reinforcing the dollar depreciation pattern.

Oil: Usually, a weaker dollar makes crude more expensive for buyers with other currencies. However, supply cuts in the Middle East have reversed this relationship: since April 7, Brent and the dollar index have risen together for five sessions, an unusual occurrence.

U.S. equities: About 43% of S&P 500 sales come from abroad. In normal cycles, each 1% decline in the dollar tends to add 0.3% to earnings per share. However, in 2025, downward pressure on technology, higher capital costs, and trade friction have dominated: the Nasdaq Composite is down about 7% despite the greenback’s depreciation.

Bitcoin and cryptocurrencies: Digital assets tend to rebound when the dollar weakens. Bitcoin hit its all-time high of $109,760 on May 21, just days before the DXY reached its annual low near 97 points in mid-June, creating a sixty-day correlation of approximately –0.50.

Emerging currencies: Currencies with high real interest rate differentials, such as the Colombian peso and the South African rand, have appreciated over 10% against the dollar so far this year. The appeal of their relative yields, combined with diversification strategies and confidence in their monetary policy frameworks, drives demand.

Three strategies for investors in this context

With the dollar index oscillating between contradictory forces, market participants should adopt a disciplined approach:

1. Defensive protection: Implement currency hedges or increase positions in euro-denominated funds to safeguard portfolio value.

2. Tactical advantage: Use dollar rebounds to gradually add positions in gold, commodities, and export-oriented stocks.

3. Continuous monitoring: Keep an eye on Federal Reserve monetary policy decisions and the evolution of the U.S. deficit, as any surprises in these areas could change the course.

The second half will arrive with contained volatility but rapid changes. Discipline and patience are key to capitalizing on movements when opportunities arise.