Dollar Index Drops Over 10% in Half a Year, Falls Below 97
According to Wind data, as of June 30, the dollar index, which measures the value of the US dollar against six major currencies, closed at 96.77. It has fallen 10.79% this year, dropping from a high of 109 to below 97, marking the worst performance for the same period since 1973. On July 1, the dollar index hit an intraday low of 96.37, the lowest level since February 2022, raising global market concerns about whether the dollar's trend has entered a downward channel.
Short-term Economic Weakness Further Pressures Dollar
The rapid decline of the dollar index is influenced by both short-term weak economic data and market adjustments in expectations of Federal Reserve policies. This year, the US economy has lost momentum in a high-interest-rate environment. In April, the CPI recorded a month-on-month rate of -0.1%, far below market expectations, leading the dollar index to lose the 100 mark. In June, ADP's "small non-farm" data showed that private sector employment unexpectedly decreased by 33,000, marking the first negative growth in two years, much worse than the expected increase of 95,000, further intensifying concerns about downward pressure on the US economy.
Data released on June 26 showed that the US GDP contracted by an annualized 0.5% in the first quarter of 2025, a significant slowdown from the 2.4% growth in the fourth quarter of 2024. Tariff policies have increased costs and uncertainties, resulting in declining corporate investment and consumer confidence, further dragging on economic momentum and leading to short-term dollar weakness.
Long-term Debt Expansion Weakens Dollar Credibility
Aside from short-term factors, the rapid expansion of the US fiscal deficit and debt levels continues to impact the dollar's credibility. On July 1, the US Senate narrowly passed the "Big and Beautiful" tax and spending bill, which is expected to raise the US debt ceiling by another $5 trillion. The Congressional Budget Office estimates that the US deficit may increase by nearly $3.3 trillion over the next decade.
Federal Reserve Chairman Powell admitted at the ECB forum that the growth path of US federal debt is unsustainable and needs to be addressed proactively; otherwise, it may impact the dollar's status as a global "safe-haven asset." Debt pressure raises concerns about the US debt repayment capability, and any selling of US debt could increase Treasury yields and further suppress the dollar index.
In May of this year, long-term US Treasury yields soared due to market selling, leading to simultaneous declines in US stocks, bonds, and the dollar, reflecting market worries about US fiscal sustainability and economic prospects.
Dollar May Weakly Perform in Second Half of the Year
Considering short-term economic weakness and long-term debt pressures, the dollar index is expected to trend weaker in the second half of the year. The negative impact of the US tariff policy on the economy continues to manifest, and the Fed may be forced to balance between economic pressure and inflation, with markets generally expecting a rate cut in September or later this year to address economic slowdown.
At the same time, divergent monetary policies between the Eurozone and Japan, which are gradually shifting towards easing, may also exert pressure on the dollar. However, if global geopolitical conflicts escalate or the Fed turns hawkish due to unexpected inflation, the dollar may see temporary rebounds.
The dollar index's sharp fall and drop below the 97 mark in half a year is both a chance event due to weakened short-term economic momentum and an inevitable effect of long-term debt expansion and weakened credit. The global market needs to continuously monitor changes in Fed policy, US economic data, and geopolitical situations to determine whether the dollar's trend will hit a turning point.
