The dollar is having its worst year since Nixon. Three reasons it will get even weaker.

The U.S. dollar recorded its worst first half of a calendar year since 1973, with the ICE U.S. Dollar Index declining nearly 11% in H1 2025, and Wall Street strategists anticipate continued weakness. This depreciation is attributed to three primary factors: looming Federal Reserve rate cuts, expected as early as September; increased currency hedging by international investors; and the Trump administration's tacit 'weak dollar' policy, which aims to enhance U.S. export competitiveness. This sustained dollar weakness is seen as a significant, underappreciated tailwind for U.S. equity earnings, particularly for large-cap companies with substantial foreign income.

Analysis

The U.S. dollar has demonstrated significant weakness, with the ICE U.S. Dollar Index declining nearly 11% in the first half of 2025, marking its most severe first-half drop since 1973. This downturn is not seen as a temporary soft patch but rather the potential start of a prolonged period of depreciation, driven by a confluence of three primary factors. Firstly, shifting monetary policy expectations point to looming Federal Reserve rate cuts, with CME Group data indicating a high probability of a cut as soon as September amid subsiding inflation and a slowing labor market. Secondly, a structural shift in investor behavior is underway, as international investors, who previously held large, unhedged dollar positions, are now increasingly hedging their currency risk due to strong performance in non-U.S. equities and trade policy uncertainty. This creates what Jefferies' global head of currencies calls a "steady drip" of selling pressure on the dollar. Thirdly, the Trump administration is perceived to be pursuing a "de facto weak dollar policy" to bolster U.S. export competitiveness, viewing the currency as a non-tariff trade barrier. This combination of policy, investor positioning, and monetary fundamentals provides a strong headwind for the dollar, which in turn creates what Morgan Stanley strategists identify as a "substantial, underappreciated tailwind for U.S. equity earnings," particularly for large-cap companies with significant foreign revenue streams.

Key Decisions for Investors

• Investors should consider increasing exposure to U.S. large-cap multinational corporations, as a weakening dollar directly boosts the value of their foreign earnings upon repatriation.
• Given the consensus view of continued dollar weakness, it may be prudent to implement or maintain short positions on the U.S. dollar against a basket of major currencies.
• Monitor upcoming Federal Reserve statements for confirmation of the dovish pivot and Treasury data on capital flows to gauge the persistence of foreign investor hedging, as these are key drivers of the current dollar outlook.