Has the U.S. Dollar Found Support?
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The value of the U.S. dollar, as measured by the DXY index, is concluding its worst first half of the year in four decades.
The DXY index, which tracks greenback’s value relative to a basket of six major foreign currencies, including the euro, Japanese yen (JPY), British pound (GBP), Canadian dollar (CAD), Swedish krona (SEK), and Swiss franc (CHF), has dropped by more than 10% year-to-date. This significant drop highlights a notable shift in the currency’s performance against its global counterparts. The steepest decline has been against the CHF, a safe-haven currency. USDCHF has declined more than 14% this year so far. Kar Yong Ang, shares his expert opinion on the factors driving this move and potential USD performance.
Key Triggers of the USD Decline
The U.S. dollar recorded its worst six-month decline in four decades. At one point, the U.S. dollar index (DXY) was down more than 12% and has been setting new lows almost every month since the year began. This poor performance is likely the result of structural decline—fundamental weakening of the dollar, driven by changes in the global monetary system and demand for the currency, not just short-term market fluctuations.
One of the key drivers of the dollar’s decline has been the reputational damage and uncertainty stemming from U.S. policy under the Trump administration, which has unsettled the established global trade order. Noticing the diminishing market confidence in Trump’s policy credibility, global investors struggle to properly position themselves amid confrontational political rhetoric on the one hand and the lack of coherent, actionable policy outcomes on the other. An increasingly protectionist trade policy, characterised by punitive tariffs and open trade wars, has fractured long-standing alliances and undermined the U.S. dollar’s credibility as a cornerstone of the international financial system.
Compounding the damage, the recently signed-into-law ‘One, Big, Beautiful Bill’ risks driving the fiscal deficit sharply higher, raising concerns about the long-term sustainability of U.S. finances. Aready, the national debt has surged to an unprecedented level of 37 trillion dollars, which is approximately 123% of the U.S. Gross Domestic Product (GDP). The long-term debt and budget challenges resulted in Moody’s downgrade of the U.S. credit outlook—a stark signal of deteriorating sovereign credit quality.
‘Instability and uncertainty are all over the place. Normally, under these circumstances, investors would flock into the greenback, but today, the instability is stemming from the U.S. itself. That is the primary reason why global central banks keep decreasing the USD reserves and diversifying in favour of commodities like gold and safe-haven currencies like CHF,’ notes Kar Yong Ang. Indeed, according to the recent World Gold Council survey, 95% of central bank respondents expect their global gold reserves to increase within a year[1]. At the same time, 43% plan to elevate gold reserves during this time, while 73% expect a moderate or significant decline in the USD holding over the coming five years.
Recent macroeconomic data and policy expectations have further weighed on the U.S. dollar and reinforced the narrative of a structural shift away from it. Last month, the OECD cut its U.S. growth forecast for 2025, lowering it from 2.2% to just 1.6%, highlighting the fragility of the recovery even as inflation slows[2]. In May 2025, the Consumer Price Index rose just 0.1% month-over-month, bringing annual inflation to 2.3%.
With inflation finally aligning with the Federal Reserve’s (Fed) 2% target, the data have sharpened expectations for a dovish monetary response. Indeed, the Fed is expected to make several rate cuts by year-end, which is exerting an additional downward pressure on the greenback. At the same time, there is a mounting uncertainty over the Fed’s independence amid Trump’s long-standing feud with Fed Chair Jerome Powell.
Markets are increasingly pricing in the possibility that Trump could replace Powell as early as this fall, months ahead of Powell’s May 2026 term expiration. Given that Trump has previously criticised Powell for not lowering the rates fast enough, it seems reasonable to assume that Trump’s pick for the next Chair of the Fed would be a dove, which may pressure the dollar even further.
The USD Performance in the Near Future
Although the USD currently looks very weak, there are signs that its recent nascent recovery may extend and continue into the future.
Kar Yong Ang comments: ‘First of all, investors’ positioning is too bearish with lots of short positions outstanding. However, the only way to make profit on these short positions is to cover them, which will immediately trigger a rebound in DXY. Secondly, I personally believe that investors are too optimistic when it comes to Fed’s rate cut expectations and risk being disappointed. And even if the Fed does deliver a rate cut in September, which is probable, it will be a classic “sell the rumor, buy the news” kind of event’.
Indeed, according to the most recent CFTC COT report, large speculators were holding a total of 4,318 net-short contracts in DXY, just 3% below the three-year high, which indicates an extremely overcrowded short trade[3]. Once traders begin to cover their short positions, the greenback will rebound. In fact, this is already happening. According to CFTC, in the week ending 1 July, large speculators increased their long exposure in DXY by 3,592 contracts, which is the sharpest one-week increase since 22 October, 2024.
As for the current monetary policy expectations, they are indeed rather dovish. The latest interest rates swaps market data shows that investors are pricing in a 45% chance of two 25-basis point (bps) rate cuts by the Fed by the end of the year despite the ongoing tariff issues (which will almost certainly drive inflation higher) and despite the recent upbeat Nonfarm Payroll (NFP) reading. In fact, the jobs report showed a gain of 147,000 new jobs in June, higher than the 110,000 increase expected by the market. Furthermore, the Personal Consumer Expenditures (PCE) price index, the Fed’s favoured inflation measure, remains elevated (at 2.6%) and can rise further due to higher import costs.
Overall, despite its structural weakness, the U.S. dollar remains the world’s dominant reserve currency. What is more, there are no obvious fundamental alternatives to USD that can be equally safe and liquid. At the same time, investors’ monetary policy expectations have become a bit too dovish and need to be adjusted in light of global trade uncertainty and the still resilient labour market.
‘Technically, the DXY rally, which began on 1 July, may extend into the 98.005-98.392 range, as suggested by Fibonacci projection analysis. A confident break above 98.40 and consolidation above this level would then open the way towards 99.60 and 100.00’, concludes Kar Yong Ang.
U.S. Dollar Index (DXY) 4-Hour Technical Chart
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About the Author
Ang Kar Yongcontributor
Kar Yong achieved financial independence through trading and investing, recognized as a top FX analyst and trainer in Asia.
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