Central banks saw no threat to the dollar's dominance. What will happen to its exchange rate in the future?

Central banks see no real threats to the dollar's dominance as the world's reserve currency in the foreseeable future. This was stated by central bank heads at the annual conference in Portuguese Sintra. The first half of the year was the worst for the dollar since 1973. What will happen to the exchange rate next?

European Central Bank President Christine Lagarde has admitted that the euro will one day manage to become an alternative to the dollar - but only if the eurozone countries carry out the necessary reforms. «Чтобы произошли серьезные перемены, потребуется много времени и усилий»,  — Reuters quoted Lagarde as saying at a panel discussion with the heads of the central banks of the United States, Britain, Japan and South Korea. "It's not going to happen overnight. History shows that it doesn't happen," she emphasized.

Bank of Japan Governor Kazuo Ueda is also confident: everything will come down to the need for reform. "To some extent, it depends on what regions like Europe or China do to improve the efficiency and convenience of their currencies," he said, citing the example of capital market integration in the eurozone.

Bank of England Governor Andrew Bailey sees no preconditions for a rapid reassessment of the dollar's role. «На данный момент я не наблюдаю серьезного сдвига», — отметил он. Any currency aspiring to reserve status must provide sufficient low-risk assets denominated in that currency for financial market participants to utilize, Bailey said.

Bank of Korea Governor Lee Chang-yong added: talk of a possible shift in currency priorities does take place, but in practice, things are still the same for now. "There seems to be talk about it. But for now, investors are keeping the dollar's share in reserves and just increasing hedging," explained the banker.

The dollar ended the first half of 2025 with its worst performance in half a century - since the end of the Bretton Woods monetary system, wrote the Financial Times. The 10.8% fall in the US currency index between January and June this year was also the steepest compared to any half-year since 2009. Trade wars, huge U.S. borrowing and doubts about whether the Fed will remain independent have undermined the dollar's appeal as a safe haven for investors. 

Predictions that Trump's trade policy would do more damage to other economies and, as a result, strengthen the dollar, did not materialize. The euro, which many on Wall Street had expected to be at parity with the dollar, rose 13% to $1.17. In the words of ING currency strategist Francesco Pezole, foreign investors are demanding more currency hedging of dollar assets - and that's preventing the dollar from rebounding from the rise in the U.S. stock market.

The dollar is now trading at its lowest level in more than three years. The bet on its weakening has become so massive that analysts expect the decline to slow. "The bet on a weak dollar has become overwhelmed, and I think the pace of decline will slow," said Guy Miller, chief market strategist at Zurich Insurance Group.

Three main factors are driving the dollar's exchange rate right now: trade, fiscal policy and Fed expectations - the latter leading the way, by far, wrote Convera currency strategist Antonio Ruggiero on July 1.

- Trading. Despite positive moves - from hopes for a deal with China to Canada's removal of a digital services tax on tech giants and progress in talks with India and the EU - all of this has had little impact on the dollar so far, Ruggiero said. The market is waiting for specifics: we need clear agreements and an understanding of how much the Fed is really ready to cut rates.

- Fiscal Policy. The US Senate has approved an updated version of Trump's "big, beautiful" tax bill, and the document will now head to the lower house of Congress for a second vote. Markets are cautious: the Congressional Budget Office estimates that the package would increase the US budget deficit by $3.3 trillion over the next decade - up from $2.8 trillion in the original version passed by the House of Representatives. The resistance to Trump's bill even within the Republican Party, the accelerated timeline for passage and the lack of details are causing markets to have deja vu - the uncertainty is hitting the dollar harder than the substance of the initiative itself.

- US Fed. The US central bank remains the main source of pressure on the dollar: the market is in no hurry to believe in a decisive "dovish" turn, especially against the background of mixed macro statistics and inflation, which may accelerate again. The focus is on this week's labor market data: if the reports are strong, it could adjust expectations for a September rate cut and give the dollar a reason to rebound, considers Ruggiero.

This article was AI-translated and verified by a human editor