2025 Review: The greenback lost the battle

The U.S. dollar is ending 2025 as one of the weakest currencies among developed economies. The Dollar Index (DXY) has fallen by 9.5–10% year-to-date, marking its sharpest annual decline since 2017 and one of the worst performances since the U.S. abandoned the gold standard.

Key Drivers Behind the USD Decline

The Fed’s shift to a rate-cutting cycle

A consistent easing of monetary policy has narrowed yield differentials between the U.S. and other economies, reducing the appeal of dollar-denominated assets. Market expectations point to an additional 50–75 bp rate cut by the Fed by the end of next year.

Trump administration trade and domestic policy

The introduction of aggressive tariff measures in the spring sharply increased market volatility and triggered a nearly 15% short-term drop in the dollar, followed by only a partial recovery.

Pressure on monetary policy independence

Public attacks on the Federal Reserve leadership, verbal pressure on Jerome Powell, and discussions around a potential replacement of the Fed chair undermined investor confidence in the independence of the U.S. monetary system.

Financial repression policies

Efforts to cap Treasury yields, the potential resumption of Fed Treasury purchases of up to $40 billion per month, and plans to expand demand for government debt via the banking sector and the stablecoin market are artificially suppressing yields.

At the same time, the stablecoin market capitalization is projected to grow from $300 billion by as much as tenfold, further eroding the dollar’s competitiveness versus other currencies.

Who Benefited from a Weaker Dollar?

• Exporters: A weaker currency improved the price competitiveness of U.S. goods. Over the first nine months of the year, exports rose by 5% ($125 billion). Growth in export-oriented sectors supported job creation in manufacturing and agriculture.
• Multinational corporations: Companies in the S&P 500 benefited from foreign revenue translation into a weaker dollar, supporting earnings from international operations.

Who Lost?

• US consumers: Higher import prices intensified inflationary pressure. In November, inflation reached 2.7%, exceeding the Fed’s target and eroding household purchasing power.
• Outbound tourism: Foreign travel became noticeably more expensive for U.S. citizens, while the U.S. became a more attractive destination for international tourists.

Global Spillovers

Dollar weakness was accompanied by strength in alternative currencies. The Chinese yuan moved past 7 per dollar, despite efforts by the PBoC to limit the move.

Foreign bond yields retain upside potential, while U.S. yields are constrained by policy decisions—accelerating capital outflows from the United States.

Additional pressure comes from structural FX hedging. Foreign investors—particularly in Europe—have increased hedging of USD exposure when investing in U.S. equities. Derivative-based hedging generates persistent downward pressure on the dollar.

Despite a technical rebound of roughly 2.5% from September lows, the fundamental picture remains unfavorable. Equity market strength in the U.S. is no longer supporting the currency. Markets continue to price in further Fed rate cuts, while other central banks—including the ECB, Japan, and Australia—retain the option to hold or even raise rates.

Another bearish factor is the U.S. Treasury’s need to finance a large tax-stimulus package. To place new debt, the Treasury is pushing for regulatory easing for commercial banks and advocating for stablecoins to be backed by Treasury bills.

What should traders do?

• treat the dollar primarily from the short side against currencies backed by tighter monetary policy;
• account for rising FX hedging activity as a medium-term bearish factor for USD;
• avoid long-term bullish USD positions without clear confirmation of a Fed policy reversal.

The dollar remains a vulnerable asset, demanding discipline, tactical restraint, and strict risk control. A rational approach and avoidance of excessive risk are fully justified in the current environment.

So we act wisely and avoid unnecessary risks.

xChief Company thanks everyone for their fruitful cooperation and wishes you personal victories, financial success and peace in the New Year.

Profits to y’all!