Why the USD is plunging in 2025 — and what it means for markets

The U.S. dollar recorded its steepest January-to-June decline since the 1970s in 2025, falling over 10% against a basket of peers, driven by investor anxiety over the Trump administration's fiscal and trade policies and a ballooning federal deficit at 6-7% of GDP. This depreciation has spurred a significant capital rotation, with gold surging 25% and major currencies gaining, while foreign holders of U.S. debt are incurring losses as U.S. Treasuries are negatively impacted. The weakening dollar also fuels 'imported inflation' by making foreign goods more expensive for U.S. consumers, with its future trajectory closely tied to impending fiscal legislation and trade developments.

Analysis

The U.S. dollar experienced its most severe first-half decline in fifty years in 2025, depreciating over 10% against a peer currency basket, reflecting significant investor distress over U.S. fiscal and trade policies. This anxiety is fueled by a federal deficit projected at 6-7% of GDP and a national debt exceeding $36 trillion, leading market participants to question the dollar's long-term viability as the world's primary reserve currency. The fallout has triggered what PIMCO terms a "prominent capital rotation" out of U.S. assets. Consequently, gold has surged 25% in its strongest first-half rally since the Bretton Woods collapse, while the euro and Swiss franc gained 12.5% and 13.5% respectively. Conversely, U.S. Treasuries have been heavily impacted, with the 30-year yield hitting 5.1%, inflicting substantial losses on foreign bondholders as the dollar's weakness erases returns upon currency conversion. This dynamic is also creating domestic economic pressure through "imported inflation," raising the cost of foreign goods for U.S. consumers. The dollar's trajectory for the second half of the year remains precarious, heavily dependent on the outcome of an impending fiscal bill and escalating trade tensions.

Key Decisions for Investors

• Investors should consider hedging or reducing net long exposure to the U.S. dollar, as strong downward momentum is being driven by unsustainable fiscal policy and a clear capital rotation into alternative currencies.
• Gold (GLD), the Swiss franc (FXF), and the euro (FXE) have proven to be effective safe havens and hedges; re-evaluating allocations toward these assets may offer protection against further dollar depreciation and U.S. asset underperformance.
• Extreme caution is warranted for unhedged foreign holders of U.S. Treasuries (GOVT) due to significant currency-driven losses, and all investors should monitor upcoming fiscal and trade policy deadlines as primary catalysts for future market volatility.