2025 Results: the dollar lost the battle

The US dollar is ending 2025 as the weakest major currency among its global peers. The Dollar Index (DXY) has fallen by approximately 9.5–10% year-to-date, marking the sharpest annual decline since 2017 and one of the worst performances since the abandonment of the gold standard.

Several factors drove the decline:

The Federal Reserve entered a rate-cutting cycle.

Repeated monetary easing narrowed the yield differential between the US and other economies, reducing the attractiveness of dollar-denominated assets. Markets expect an additional 50–75 basis points of rate cuts by the end of next year.

Trump administration trade and domestic policies increased volatility.

Aggressive tariffs introduced in the spring triggered a near-15% short-term collapse in the dollar, followed by only a partial recovery.

Attempts to interfere with monetary policy.

Verbal pressure on the Fed, public attacks on Jerome Powell, and discussions about replacing Fed leadership undermined confidence in monetary policy independence.

Financial repression.

Plans to suppress Treasury yields, a potential return to Fed Treasury purchases (up to $40 billion per month), and efforts to expand government debt demand through banks and the stablecoin market—whose capitalization could grow tenfold from $300 billion. Artificial yield suppression makes the dollar less competitive versus other currencies.

Winners from the assault on the dollar:

• Exporters: US goods became cheaper for foreign buyers. Exports rose 5% ($125 billion) in the first nine months, supporting job creation in manufacturing and agriculture.
• Multinational corporations: A weaker dollar boosted price competitiveness. S&P 500 companies earned higher profits from overseas operations when converted into a cheaper dollar.

Losers:

• US consumers: Imports became more expensive, with inflation reaching 2.7% in November—above the Fed’s target—reducing purchasing power.
• Outbound tourism: International travel became significantly more expensive for Americans, while the US became more attractive for foreign tourists.

Dollar weakness strengthened other currencies. The Chinese yuan broke below 7 per dollar despite PBOC intervention attempts. Foreign bond yields have room to rise, while US yields remain politically constrained, accelerating capital outflows.

Additional pressure comes from structural USD hedging. European investors increasingly hedge currency exposure when investing in US equities, and derivative hedging creates persistent downward pressure on the dollar.

Despite a technical rebound of about 2.5% from September lows, fundamentals remain negative. Rising US equity prices will not save the dollar. Markets expect Fed rate cuts, while other central banks—including the ECB, Japan, and Australia—may hold or raise rates.

The US Treasury must finance Trump’s “big and beautiful” tax-cut law. To place new bond issuance, regulators are urged to ease bank purchases and require stablecoin issuers to back tokens with Treasury bills.

What should traders do?

• Primarily view the dollar from the short side against currencies with tighter monetary policy.
• Factor in growing currency hedging as a medium-term bearish force for USD.
• Avoid long-term USD bullish positions without clear evidence of a Fed policy reversal.

The dollar remains a vulnerable asset, demanding disciplined tactics and strict risk management.

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!