US dollar has worst first half in more than 50 years amid Trump tariffs

The first half of 2025 saw the US dollar record its worst performance in over 50 years, falling 10.8% against a basket of currencies, primarily driven by concerns over Trump's trade policies, rising national debt, and expectations of US interest rate cuts. Despite significant volatility, global equity markets generally posted gains, with the S&P 500 rebounding from a 10% drop to a record high by June, fueled by expectations of Fed rate cuts, strong earnings, and AI optimism, though US markets lagged some European counterparts. This period also saw gold surge 25% as a safe haven, indicating a notable shift in investor preferences and asset allocation away from traditional US market dominance amidst geopolitical and policy uncertainties.

Analysis

The first half of 2025 was defined by a significant depreciation of the US dollar, which fell 10.8% against a basket of currencies for its worst first-half performance since 1973. This decline is attributed to investor concerns over the Trump administration's economic policies, including a budget projected to increase national debt, ongoing trade conflicts, and sustained pressure on the Federal Reserve for interest rate cuts, collectively undermining the dollar's safe-haven appeal. In response to this uncertainty, capital flowed into alternative assets, with gold surging 25% and the euro appreciating 5%. US equity markets experienced extreme volatility; the S&P 500 index recovered from a sharp 10% drop to achieve a record high, a rebound driven by expectations of tariff pauses—the 'Taco' trade—and impending Fed easing. Despite this recovery, US markets have notably underperformed European counterparts, with the S&P 500's 5% gain trailing Germany's DAX (+20%) and the UK's FTSE 100 (+7.2%), signaling a significant asset allocation shift away from US-centric portfolios. Within the US, performance was highly divergent, illustrated by Meta's 25% gain on AI optimism versus Apple's 20% loss amid tariff fears.

Key Decisions for Investors

• Consider hedging US dollar exposure or increasing allocations to safe-haven assets like gold, which has demonstrated strong performance amid rising geopolitical and policy uncertainty.
• Re-evaluate geographic allocations, as European equities, particularly Germany's DAX, have substantially outperformed the S&P 500, suggesting opportunities outside the US market.
• Adopt a highly selective approach within the US technology sector, differentiating between firms benefiting from secular trends like AI, such as Meta, and those vulnerable to trade policy risks, like Apple.
• Monitor US policy developments closely, as shifts in trade tariff announcements and Federal Reserve interest rate rhetoric have been the primary catalysts for significant market volatility and intraday reversals.