Summary:
In 2025, the US dollar fell nearly 9%, as Wall Street remains bearish due to rate cut expectations, economic uncertainty, and trade policies.
The US dollar has fallen 8.9% so far in 2025, more than erasing its 2024 gains. The White House suggested Trump and Xi Jinping could have a conversation about trade as soon as this week.
Wall Street banks are reinforcing their calls that the dollar will weaken further, hit by interest-rate cuts, slowing economic growth and Donald Trump's fickle trade and tax policies.
The greenback will fall to hit 91 by around this time next year and the 10-year Treasury yield will reach 4% by the end of this year before staging a much larger decline next year, according to Morgan Stanley.
The bank listed the euro and the yen among the biggest winners from the greenback's slide, along with the Swiss franc. Similarly, JP Morgan recommended long bets on the yen, euro and Australian dollar last week.
Goldman Sachs noted a potential change to US tax rates on foreign individuals and companies is expected to exacerbate concerns about risks of US investments which have already come under pressure.
In a separate report, it said their models suggest the dollar is about 15% overvalued and therefore it has further to fall. The decline will likely be driven by reallocation and repricing of global assets.
Wells Fargo also said "a medium-term narrative around a weaker dollar is building." Traders are looking to a slew of employment data this week to determine the next shifts in Fed policy and its implications for the dollar.
Fundamental shift
The close relationship between Treasury yields and the dollar has broken down. They have tended to move in step with each other in recent years as higher yields typically appeal to foreign capitals.
Since Trump's "liberation day" tariffs were announced, the 10-year yield has risen around 250 bps, while the dollar suffered great losses. The correlation hit its lowest level in nearly three years this month.
Debt selloff resulted from unsustainable fiscal deficits and unpredictable trade policies, rather than strong economic outlook, which happens more frequently in EM markets, said UBS analyst Shahab Jalinoos.
The Fed has refrained from monetary easing since December 2024. However, higher for longer borrowing costs loom large for the federal government that aim to spur growth and balance budget.
That is not an unprecedented case though. During the European debt crisis that began in 2009, Greek10-year bonds yielding nearly 4000 bps more than French government bonds at their peak.
The new pattern could increase risks for investors seeking haven assets, said Andreas Koenig, head of global FX at Amundi. Gold is growing popular as a tool to hedge dollar-denominated portfolio.
The ultra-wealthy are increasingly moving their gold offshore increasingly opting for physical gold bars instead of paper, according to a CNBC report in May.
BNPP forecasts the 10-year yield to finish 2025 around 4.25%. It does not expect any Fed rate cuts this year, citing inflationary concerns, multiple policy uncertainties, and a still-solid growth backdrop.
Emerging menace
Trump's erratic policies offer a "prime opportunity" to strengthen the euro's international role and allow the currency bloc to enjoy more of the privileges so far reserved for the US, ECB President Christine Lagarde said.
She repeated calls to complete the single market, trim regulation and build the savings and investment union. The bloc's capital market is highly fragmented, undermining its competitiveness.
Russia aggression and US protectionism appear to be a "double-edged sword" for Europe. While the events deal a blow to economy, solidarity across the continent has enhanced, including reconciliation between the EU and UK.
Lagarde reiterated that there should be more joint financing on the European level for measures including defence as progress on that front would mean investors would have a deeper pool of securities to tap into.
George Buckley, chief European economist at Nomura, sees upside ahead for the euro to some extent. "The euro is still a distant second, but it's gaining in momentum quite significantly with all the things going on."
The euro's 20% share of world reserves has remained fairly constant at this level for the past 10 years. During that period, the dollar's share has fallen by seven percentage points.
A paper from Fed Board economist Colin Weiss shows homed in on the fact that roughly three-quarters of foreign official holdings of US assets are with countries that have military ties to Washington.
Military spending boom raises questions about how Europe will view their dollar reserve holdings going forward. And potentially deeper crack within the transatlantic alliance would likely affect the rest of the world.
Disclaimer: This material is for general information purposes only and is not intended as (and should not be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by EBC or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.
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