The US dollar index plunged 10.8% between January and June 2025 — its worst first-half performance since 1973, the year the Bretton Woods system collapsed. This steep decline marks the weakest showing for the dollar in over three years and has sparked a global reassessment of US economic stability.
The depreciation has affected investors, governments, as well as consumers, making it difficult for capital flows and trade dynamics and questioning the long-term strength of the dollar.
Trump’s ‘Liberation Day’ Tariffs Cause Market Mayhem
The rout started after President Donald Trump unleashed blanket tariffs on April 2, dubbing it “Liberation Day.” The bold action — much wider than anticipated — set off a selloff in markets. In three days, $5 trillion was erased from the S&P 500 index.
Even after Trump suspended most tariffs (all except China) on April 9 for 90 days, investor confidence was still shaken. Treasury yields surged as investors offloaded government bonds, increasing the borrowing cost.
Debt Explosion Under the ‘One Big Beautiful Bill Act’
The other primary reason for the dollar’s decline is Trump’s “One Big Beautiful Bill Act.” The bill seeks to continue tax cuts of 2017, cut welfare and healthcare expenditures, and boost borrowing heavily.
Republicans expect to move the bill through Congress by the July 4 holiday, while the Congressional Budget Office estimates it will raise federal debt by $3.3 trillion by 2034. Deficits will rise to 6.9% of GDP, making fiscal pressures more severe.
Moody’s cut the US credit rating in May based on governance issues and deteriorating debt trends — further weakening world investor confidence in US assets.
Federal Reserve Rate Cuts Expected
Trump has publicly asked the Federal Reserve to reduce interest rates in the wake of signs of slowing economy. Markets now expect two to five cuts in rates by the end of 2025. While equity markets rallied, the weaker dollar diluted foreigners’ returns. For example, the 24% gain in S&P 500 is only 15% when calculated in euros.
Safe-Haven Status Diminished
Investors and central banks are shedding their exposure to US assets. Money is pouring into European markets and alternatives such as gold, which hit new highs on the back of central bank purchases and dollar concern.
The OECD downgraded its US growth forecast in June, reducing it from 2.2% to 1.6%, due to fiscal risks and weakening momentum.
Effect on Americans: Travel, Trade, Inflation
For US consumers, the lower dollar results in more expensive imports and foreign vacations. While US exports become competitive, unstable tariffs create uncertainty for gains in trade. With fewer dollars in circulation in world trade, investment in US assets also declines.
Analysts contend that while the dollar began 2025 at high levels — tempering some of the descent — the conjunction of policy uncertainty, debt growth, and rate pressure indicates a turnaround is unlikely without profound reforms.