The greenback’s near-nine-per-cent fall in 2025 so far can be attributed to multiple factors, including the US’ rising debt, fears of recession and actions of the central banks across the globe. But President Donald Trump’s disruptive streak with regular policy flip-flops has only accentuated the problem and has reduced the appeal of the world’s reserve currency, the US Dollar.
The greenback, a colloquial name of the US dollar, is facing the heat of late. The US Dollar Index (DXY), a widely tracked gauge of the greenback’s performance against a basket of six major currencies, has been on a steep decline. In 2025 so far, it has slipped nearly nine per cent from the highs of 110 to sub-99 level now.
Multiple reasons could be attributed to the dollar’s slide. President Trump’s re-election in 2024 amid much fanfare is settling now and the day to day business is taking a grip. The fact that he would be a disruptor was not a secret, but the manner in which he has gone about his business, has surprised many.
The US economy was doing quite well with a fairly robust job market in 2024, though inflation remained sticky. But since the time Mr. Trump took over the reins in January, things have not been the same.
The chorus of an economic meltdown is getting louder with agencies after agencies slashing global growth outlook. International Monetary Fund (IMF) in its latest outlook for the US, has cut 2025 GDP growth forecasts from 2.7 per cent to 1.8 per cent. Meanwhile, Goldman Sachs has raised the odds of a US recession for the second time in a week from 35% to 45% now due to an escalating trade war.
Data emerging out of the US is showing softening in retail sales while growing sluggishness in the industrial output. Consumer sentiment has dipped as fears of inflation owing to tariff wars are taking root.
Tariff flip-flops
While the Trump administration has been drumming the narrative of ‘Making America Great Again’ by asking people to be prepared for short term shocks for long term gains, a proper plan is yet to be set in place.
For instance, the 90-day tariff pause appears to be knee-jerk reaction after China and other countries started selling US treasuries, leading to a spike in US yields.
On April 2, when Trump announced tariffs on more than 70 nations keeping base tariff rates at 10%, many top voices in the US questioned the methodology used by his administration to arrive at tariffs for respective countries.
He has not just antagonised traditional foes like China, but even the US’ long-term allies as well. Following the announcements, many countries stood up with their own retaliatory measures against the US stance.
More than the tariffs, it is the unpredictability of the administration that worries the world more. Moreover, experts see the three-month time not adequate enough for the US to take-up tariff issues with all its trading partners. They see half-baked solutions that could lead to more confusion.
Reserve currency
The US dollar is the world’s reserve currency and also the currency for global trade. In the times of crisis, countries and businesses flock to buy dollars to hedge their bets. While the US cannot be immediately written-off, the global order could begin to change soon. The US has been walking out of global pacts like Paris Climate agreement, threatening to dismantle WTO, stopping humanitarian aids to countries, among others.
The US has ruled the world because of the clout it has enjoyed as a global player. An isolated US will ensure that the world gradually moves away from the dollar, thus reducing the greenback’s heft, in the long term.
With retaliatory tariffs, many countries have shown a willingness to stand against the US policies and may now push for trading in currencies other than the dollar.
The China+1 momentum that was bult post Covid-19 is appearing to be wearing away and we could see many countries turning to China for trade. Beijing has been going full throttle to create a support system around itself by reaching out to countries even as the US waits for countries to come to it.
While Trump calls his tariff actions as moves to boost domestic manufacturing, markets are interpreting them as a risk to global trade flows.
Investors, wary of a repeat of the 2018-19 tit-for-tat tariff battles, are rebalancing portfolios towards safer assets. This means that the demand for USD could go down, further weakening it.
Shifting priorities
With inflation showing signs of moderation and unemployment ticking up slightly, the Fed has hinted at rate cuts in the second half of the year. This dovish tilt has made US assets less attractive in terms of yield, prompting investors to seek better returns elsewhere. As interest rate differentials narrow with other major economies like the Eurozone and Japan, the dollar’s appeal has dimmed.
The shift towards gold has been unimaginable. The institutional buying of gold has increased with global central banks doubling-down on their yellow metal purchases. Poland emerged as the largest gold buyer among central banks worldwide in 2024, acquiring 90 tonnes of the precious metal. It was followed by Turkey.
India was the third largest buyer of gold in 2024. The Reserve Bank of India (RBI) purchased 72.6 tonnes of gold, raising its gold reserves by 9%. The Indian central bank bought gold in 11 out of the 12 months last year.
China too bought 44 tons of gold.
This is an indication that gold has a higher institutional appeal than the US dollar. It is also an indication that the world is moving towards a slowdown or a recession in the worst-case scenario.
the US’s rising debt has added to the woes of the dollar, putting a question mark on the fiscal discipline of the world’s largest economy. The Congressional Budget Office has projected a ballooning fiscal deficit over the next decade, reinforcing the perception that the US is overleveraged.
Monetary policy outside the US is also playing a role in the dollar index’s decline. The European Central Bank (ECB) and the Bank of England have signalled fewer rate cuts than previously anticipated, thanks to resilient inflation and wage growth in their respective regions. Even the Bank of Japan, traditionally dovish, surprised markets by tweaking its yield curve control policy and hinting at potential normalization. These actions have strengthened the euro, pound, and yen — all components of the DXY basket — against the dollar. As a result, even modest shifts in tone by foreign central banks have translated into disproportionate pressure on the US dollar.
The outlook for the dollar index remains clouded with uncertainty at the moment. Policy certainty and the US economy would be of utmost importance.