Why the US Dollar Could Rebound Like Past Crises – Lessons from BOE’s Greene

The US dollar’s recent weakness has sparked debates about its long-term viability as a global reserve currency. However, Bank of England (BOE) economist Andrew Greene argues that the greenback’s trajectory in 2025 mirrors patterns from past crises, where structural shifts and policy responses ultimately propelled a rebound. Let’s dissect the evidence.

Fiscal Stimulus: Europe’s Rally vs. US Tariffs

Europe’s aggressive fiscal stimulus—such as Germany’s €500bn infrastructure fund and the EU’s €800bn Stability and Growth Pact measures—has driven the euro’s surge, pushing the DXY index below 106. This contrasts sharply with the US’s reliance on tariffs to boost revenue, which has stifled domestic growth.

The tariff impact is clear: two-year Treasury yields have fallen below 4%, and the Fed’s terminal rate was cut to 3.50% from 3.75% in just four weeks. Yet, history shows that fiscal divergence alone doesn’t doom the dollar. During the 2008 crisis, aggressive US stimulus and Fed easing stabilized the currency despite initial declines.

Monetary Policy: Fed’s Dovish Turn vs. ECB’s Caution

The Fed is expected to cut rates by 72–73 basis points in 2025, while the ECB’s rate floor remains anchored at 1.75%. This divergence reflects cyclical US weakness versus Europe’s fiscal-fueled optimism.

Greene notes that the USD’s current slump is cyclical, not structural. During the 2020 pandemic, the dollar surged despite massive Fed stimulus because it retained its safe-haven status. Similarly, today’s geopolitical tensions—such as fears over US security guarantees—are testing that status but haven’t yet eroded it.

Market Expectations: EUR/USD Targets and Technicals

Analysts now see EUR/USD hitting $1.03–$1.04 by mid-2025, up from earlier $1.00–$1.02 forecasts. Technical resistance at $1.0670 has been broken, suggesting further upside. Meanwhile, the DXY could dip to 104.00 if US jobs data weakens further.

Lessons from Past Crises

1. 2008 Financial Crisis: Aggressive Fed easing and fiscal stimulus stabilized the dollar despite initial panic.
2. 2020 Pandemic: The dollar rallied as a safe haven, even as global liquidity surged.
3. 2025 Dynamics: Fiscal divergence and geopolitical risks are key, but no systemic collapse is imminent.

Risks: Tariffs and Geopolitics

US tariffs—now labeled a “little disturbance” by President Trump—risk prolonging USD weakness. Unlike past crises, where coordinated global stimulus prevailed, today’s trade wars and fragmented fiscal policies could delay recovery.

Conclusion: A Cyclical Rebound, Not a Permanent Decline

The USD’s current slump is cyclical, driven by weak US data and European fiscal overreach—not a loss of reserve status. Key data points support this:
- EUR/USD: Likely to stabilize at $1.03–$1.04 by Q3 2025, not $1.00 as previously thought.
- DXY: Could hit 104.00 if NFP disappoints but is unlikely to collapse further.
- Fed Policy: Rate cuts may stabilize markets, mirroring post-2008 and 2020 recoveries.

Greene’s analysis suggests that the USD’s rebound hinges on two factors: US tariff reversals (unlikely soon) and Fed easing. Historically, the dollar has bounced back when policy and data align—2025 could be no different.

Investors should monitor EUR/USD’s $1.0670 breakout and DXY’s 105.10 support. If the Fed acts decisively, the USD could regain traction by year-end, echoing recoveries seen after past crises.

In short, while the USD faces headwinds, its resilience in prior crises offers a roadmap for recovery—if policy and geopolitics allow it.