The dollar posted its worst first-half performance in 52 years. The greenback fell by 10.7% against a basket of world currencies, making it the worst first half since 1973, the year Nixon ended the Bretton Woods gold standard. While President Trump digs up the deficits with his “beautiful” budget bill, while once again railing against the independence of the central bank and letting…Bitcoin shine.
Yet between September 2024 and mid-January 2025, the dollar had risen by more than 9% against the euro. This fall in the European currency actually reflected the rise of the US dollar, which had been fuelled mainly by Donald Trump’s victory in the US presidential elections at the end of 2024. Trump’s return to the White House revived investor confidence, buoyed by his promises to cut taxes and revive US industry.
But since mid-January 2025, the euro has been back on the rise (+12%) due to concerns about Donald Trump’s initial statements on taking office. It should be noted that Donald Trump has stated his desire to have a weak dollar in order to re-industrialise the USA. The greenback reached its lowest level since February 2022, at 1.182, on 30 June, the last day of the six-month period. And despite higher dollar interest rates…and eight consecutive rate cuts in euros.
1.602 in 2008 for the euro/dollar..
Many may have forgotten that the euro hit an all-time high of 1.6020 in July 2008. Since then, the euro has fallen against the US dollar in a succession of cycles in 2008, 2010, 2014, 2018 and finally 2021, with a return to parity of 1 euro to the dollar in 2022 and a low of USD 0.95 in September 2022. Since then, the euro has begun to recover, rebounding by more than 18% in July 2023.
But it is by no means certain that the dollar’s current rapid fall against the euro will continue, and others on Wall Street believe that the downward trend could be reversed. Since then, the euro/dollar exchange rate has fallen slightly in July to close in on 1.15.
However, the US dollar is likely to face the same headwinds as in the first half of the year.
Indeed, many of the same factors – policy volatility, ballooning debt and deficits, and potential interest rate cuts by the Federal Reserve, to name but a few – are likely to remain on investors’ minds as they look for other ways to protect themselves.
Vincent Mortier, CIO at Amundi, even believes that the dollar’s traditional status as a safe haven could be called into question if deficits and debt continue to slide. “We have lowered our rating on the dollar. There are many uncertainties surrounding US fiscal and budgetary policies that could affect the dollar’s appeal. Although the majority of global players are still exposed to the greenback, the long-term risks are converging towards a fall in the US currency. We have slightly upgraded our sentiment on the euro, which should benefit from diversification against the dollar and a possible asset allocation more favourable to Europe.”
“We are seeing two types of factor contributing to the appreciation of the euro against the dollar,” explains Sean Shepley, Senior Economist at AllianzGI Sean Shepley, Senior Economist at AllianzGI.
“Firstly, investor confidence in the eurozone’s recovery has improved with Germany’s decision to increase investment in infrastructure and defence spending. Germany, which has been the weak link in the eurozone’s growth since the pandemic, is now showing signs of more positive growth in the future, benefiting the euro.
Sean Shepley continues: “Conversely, in the United States, investors have been forced to reassess the outlook for economic policy, even its medium-term predictability. We suspect that, following this analysis, a strong demand for hedging against the USD currency risk has already been confirmed. As a result, the depreciation of the US dollar should slow in the second half of the year.
However, the effects of the US administration’s labour supply policy on future growth are not sufficiently clear. In this respect, we believe that the environment will remain very difficult for the dollar.
At the end of the year, Sean Shepley has an initial target for the euro/dollar of 1.20, but then expects the dollar to depreciate substantially.
One currency trader summed up the dollar’s problems in his own way: “You can tick a lot of boxes. You have massive deficits, and nobody wants to put an end to them. On the other hand, you are alienating your friends, both militarily and commercially. There are enough potential negative catalysts. And once the momentum gets going, it’s hard to stop”.
The dollar’s slide began in mid-January and has shown only occasional signs of moderation since then. Hopes that President Donald Trump’s history of tariffs would subside with lower tariffs helped trigger a brief rally in mid-April. But the downward gravitational pull soon resumed. In July, with the various agreements on tariffs, the dollar took on a little colour.
Donald Trump at the centre of the debate
“Due to Donald Trump’s procrastination and doubts about the durability of American exceptionalism, the interest rate spread in favour of US bonds is no longer sufficient to strengthen the currency,” explain Didier Bouvignies, Managing Partner & Head of Rothschild Asset Management & Co and Anthony Bailly, Head of European Equity Management at Rothschild & Co Asset Management, who add: “Even so, short-term consolidation of the dollar is possible, for example as a result of tensions linked to global conflicts. More importantly, any move away from the greenback is a multi-year trend. We expect the EUR/USD to reach 1.20 around the second quarter of next year.
In the absence of an alternative to the US currency, a marked increase in the dollar’s depreciation over the coming months seems difficult to envisage, even if the growth advantage and the dominance of players in the technology sector provide support for the currency, add the two Rothschild & Co Asset Management managers.
Enguerrand Artaz, Strategist, La Financière de l’Échiquier, does not believe in a rebound: “The violence of the dollar’s depreciation in the first half of 2025 may suggest a lull over the summer. Nevertheless, we expect the trend to remain bearish in the2nd half of the year. The same arguments apply: the dollar is still overvalued, the erratic nature of US policy has led to a shift away from dollar-denominated assets and, on the other hand, there is a large supply of dollars via abundant debt issues to finance a growth deficit. We therefore believe that we are not simply experiencing a correction, but are in a downward cycle for this currency, which generally leads to a return to the equilibrium price in the first instance. For the EUR/USD, it is currently around 1.23”.
The dollar remains overvalued
In a note, Equals Money sums up the dangers ahead: “The next few weeks have all the ingredients needed to cause a stir: a critical decision by the Fed, inflation in Europe and a tightening labour market in the US. The euro’s strength is being discreetly supported by talk of the ECB taking a break, while the US dollar is keeping a tight rein on event risk. Positions are light enough on the major currencies to allow for breakaway moves, particularly if the Fed delivers something the markets are not ready to receive.”
The euro’s strength is being discreetly supported by talk of the ECB taking a break, while the US dollar is keeping a tight rein on event risk.
The dollar remains overvalued on most exchange rate indicators. With so much negative news about the dollar, why not wait for the dollar to become undervalued before rolling over your hedging positions,” asks one trader.
Another explains that we are in a phase where the downward trend is exaggerated, but fundamentally, there are certainly a lot of things to worry about.
At DNCA, we are also looking at the situation from another angle, with the temptation to take a contrarian stance as early as the beginning of July, considering the analysis of a reversal by Jerome Powell. “After calling Jerome Powel names, Donald Trump is increasingly vocal about ousting him in favour of a more accommodating profile. In this situation, it is instructive to look in the rear-view mirror for once: in the first three months after the appointment of the seven Fed chairmen since 1970**, yields (2 and 10-year) systematically rose and the dollar fell by an average of 2%.
But the impact of replacing Jerome Powell “also needs to be modulated”, according to DNCA.
In light of this, two observations are worth making. Firstly, even if the President appoints Powell’s successor by the end of the year, he will not take office until May 2026. The economic environment may change drastically between now and then. Secondly, even if a President with a more ‘dove-like’ profile is appointed, he or she will have to deal with the 11 other members of the Board of Governors. In these conditions, and on the basis of performance, sentiment and flows, the dollar seems an obvious contrarian choice for the second half of the year…”
