U.S. Dollar Plummets 8.8% in 2025 Amid Trade Policy Uncertainty

Ticker BuzzWednesday, Jun 4, 2025 9:08 pm ET
2min read

The U.S. dollar has entered a new bearish phase, with analysts warning that a potential "revenge tax" could further threaten its value. Since the beginning of 2025, the ICE U.S. Dollar Index has declined by approximately 8.8%, falling below 99 and marking the weakest start to a year since at least the mid-1980s. This downturn is not merely a result of market volatility but reflects a shift in global investors' perceptions of the dollar's role in their asset allocations, driven by the trade policies of the Trump administration.

After years of strong gains, the dollar is now experiencing a significant correction. Peter Vassallo, a foreign exchange portfolio manager at a Paris-based asset management firm, suggests that "we may be entering a longer-term downtrend for the dollar." Despite the reduced risk of the worst-case scenario from tariffs, the uncertainty surrounding U.S. policy and its hostile stance on trade remain.

Marvin Loh, a senior global macro strategist at a leading financial services company, also notes that "the dollar has further downside potential." Historically, the dollar experienced a six-year depreciation cycle starting in 2002, during which the euro gained strength. A similar dynamic appears to be emerging today.

Current hopes for a dollar rebound are limited, while new uncertainties continue to accumulate. For instance, the Trump administration's proposed Section 899 in its payment bill aims to grant the White House the authority to impose a "revenge tax" on foreign investors from countries with "unfair tax policies" against the U.S. Steven Englander, the head of G10 FX research at a major global bank, warns that if this provision is implemented, "it will inhibit capital inflows and have a negative impact on the dollar."

While some investors have been encouraged by the "TACO trade," betting on Trump's tendency to back down from his aggressive tariff threats, the "revenge tax" clause has once again shaken the confidence of foreign capital in holding dollar-denominated assets.

Although the dollar's weakness in 2025 appears severe, some analysts point out that considering the significant rally in 2024 following the elections, the current decline is not as dramatic in the long-term context. Vassallo argues that the dollar remains overvalued, citing this as a primary reason for shorting the currency. He emphasizes that while this strategy is becoming more common, it has not yet reached an "overcrowded" level, leaving room for further declines.

A deeper risk lies in investors, particularly institutional ones, rethinking how to manage their dollar exposure within their global portfolios. The simultaneous decline of the dollar, stocks, and bonds in April has led investors to recognize that the dollar no longer offers the same safe-haven benefits as in the past. Consequently, they are increasing their dollar hedging efforts, such as selling dollars through forward contracts.

Data from a major financial services company indicates that U.S. investors are particularly keen on hedging their overseas assets against dollar fluctuations, while institutional investors from other regions, such as insurance companies and pension funds, have also significantly increased their dollar hedging ratios.

George Saravelos, a strategist at a prominent global bank, notes that since the beginning of the year, institutional investors from a European country have "noticeably accelerated" their dollar hedging activities, reflecting widespread market expectations of a prolonged dollar weakness.

Additionally, the U.S.'s substantial fiscal deficit and the Trump administration's efforts to reduce the trade deficit have prompted more investors to seek protection against the dollar, further pressuring its value.

Market sentiment is generally bearish on the dollar, but there are potential turning points. Vassallo suggests that if U.S. assets regain their strong performance, the dollar could stage a comeback. "The value of the dollar is largely dependent on international capital flows. If U.S. stocks rebound strongly and the U.S. economy once again leads the global recovery, it will attract global investors back to the dollar."

However, as of now, the ICE U.S. Dollar Index has fallen another 0.6% to 98.75, showing weakness not only against developed market currencies but also against emerging market currencies like the Mexican peso and Brazilian real.

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