"Once a trend starts, it's hard to stop": what to expect from the dollar after the recession

Risks of a further fall in the dollar remain after the US currency collapsed nearly 11% in six months, analysts have warned. The dollar is facing a number of negatives in the second half of the year after the first was its worst since 1973. One of them is US President Donald Trump's policies, while a Fed rate cut could exacerbate the situation.

Fluctuations in trade policy, rising government debt and budget deficits, and possible rate cuts by the Federal Reserve are likely to continue to worry investors in the second half of 2025, forcing them to seek other safe havens, wrote CNBC.

"It was partly expected," said the chief market strategist at B. Riley Wealth Management's Art Hogan. - Currency traders do have something to ponder: a catastrophic budget deficit that no one is eager to reduce, whether Republicans or Democrats. A rift with allies - both militarily and in trade. There are enough potential negative catalysts. And once a trend starts, it's hard to stop."

The dollar's decline began in mid-January and has only paused sporadically since then, CNBC noted. A brief rally in April was triggered by hopes that the duties proposed by Donald Trump will not be as tough as expected. But the market's optimism did not last long.

Some analysts on Wall Street believe that the trend may reverse, noted CNBC. Thus, the head of the Asia-Pacific division of Capital Economics Thomas Matthews said that the stock market rally in June-July indicates increased confidence in U.S. assets. In his opinion, the weakness of the dollar earlier was due more to the growth of other currencies and changes in hedging strategies.

Wells Fargo also called concerns about the dollar's strength exaggerated. "If you analyze the dollar's role from a statistical perspective, it is clear that it remains central to global trade and finance and is far from losing its importance," Jennifer Timmerman, an investment strategy analyst at the bank, wrote in a note quoted by CNBC. - We believe the dollar benefits from fundamental advantages such as the rule of law, transparency and high financial market liquidity. This makes the global abandonment of the dollar an extremely difficult and slow process, especially given the vulnerabilities of other, alternative currencies."

Currency fluctuations are "not out of the norm," U.S. Treasury Secretary Scott Bessent said in an interview with the channel. Nevertheless, the rise in yields on U.S. bonds indicates continued anxiety about the dollar and other U.S. assets, CNBC writes.

Analysts at TS Lombard, for example, maintain short positions on the dollar, calling it "the gift that keeps on giving."

"Trump's attacks on the Fed and the administration's overt desire for a weaker dollar only reinforce this view," wrote Daniel von Ahlen, senior macro analyst at the firm. - The dollar remains overvalued across most currency metrics. With such a clear downside for the U.S. currency, it is reasonable to expect it to become undervalued. We remain confidently short the dollar across a variety of strategies"

"We are at a point where the pressure on the dollar may have gone too far," noted Hogan of B. Riley. - But when it comes to fundamentals, there are plenty of reasons for concern.

A weak dollar is not necessarily a bad thing for the U.S. stock market: it makes U.S. exports more competitive, as more than 40% of revenue for companies in the S&P 500 index comes from international sales. This is especially important amid the ongoing trade war, CNBC notes.

However, this currency decline has coincided with growing talk of the end of "American exceptionalism" and the dollar's loss of global dominance. U.S. public debt is approaching $30 trillion and the budget deficit could reach $2 trillion in 2025. If assets such as the dollar and U.S. government bonds lose their key position in the global system, it could seriously affect riskier assets, including equities, the channel warned.

In these conditions, the world central banks are increasing their purchases of gold, buying an average of 24 tons per month, according to the World Gold Council. According to the results of the first half of the year, the precious metal showed the best result since 1979.

"We believe central banks are buying gold to diversify reserves, reduce reliance on the dollar and hedge against inflation and economic uncertainty," said Bank of America analyst Lawson Winder.

This trend is likely to continue, he said, especially amid uncertainty surrounding US duties and the budget deficit.

The Fed may also increase pressure on the dollar if it realizes expectations of rate cuts in the second half of the year. However, the impact of such a policy is difficult to predict: in 2024, when the Fed has already cut rates, the dollar and Treasury yields, on the contrary, rose, CNBC recalls.

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