Poor Performance of the Dollar in 2025: The Sharpest Decline Since 2017

In 2025, the US Dollar Index (DXY) experienced a significant weakening. The index closed the year at 98.28, reflecting a loss of approximately 9.6%. This decline represents the worst annual performance in the past eight years and reached a level comparable to the 10% drop in 2017.

Federal Reserve’s Rate Cuts Weaken the Dollar

The central bank’s easing of monetary policy was the primary factor behind the decline in the dollar index. Three rate cuts by the Federal Reserve brought the rate range to 3.50%-3.75%. This move narrowed yield differentials, making carry trade (carry trade) less attractive for dollar holdings. The low interest rate environment reduced the appeal of dollar-denominated investments, prompting investors to seek alternative assets.

Trade Tensions Added Additional Pressure

Tariffs imposed by the Trump administration on China and European countries further increased the downward pressure on the dollar. These trade policies disrupted global supply chains and created inflationary pressures. As a result, the conditions necessary for the dollar to regain strength did not materialize.

Despite Budget Deficit, Dollar Decline Continued

Despite a budget deficit of $1.8 trillion during the fiscal year, the dollar’s decline was primarily shaped by monetary policy and trade tensions. Industry analysts view this scenario not as a permanent threat to the long-term position of the dollar index but as a cyclical adjustment.

Expectation of Stability Next Year

In 2026, a relative stabilization of the dollar index is anticipated. Financial market observers believe that the dollar’s status as a reserve currency is more likely to experience a temporary weakening rather than a fundamental loss of its reserve currency status. This perspective offers a more moderate outlook for dollar parity in the upcoming period.