Dollar Index Records Largest Drop in Twenty Years
So far in 2025, the Dollar Index has undergone an unusually deep decline. Data shows the index has dropped 12.5% in the first three quarters, slipping from a high of 110 at the start of the year to 96.37, marking its largest downturn since 2002.
Analysts point out that this decline not only reflects the market's anticipation of a shift in Federal Reserve monetary policy but also suggests a trend of the dollar's diminishing influence in the global settlement system.
The Federal Reserve's consecutive interest rate cuts since mid-year have exacerbated the decrease in the attractiveness of dollar-denominated assets. Although there was a brief rebound to the 100 mark in mid-September, the overall trend remains weak. The market generally believes that the technical rebound phase of the dollar may have ended.
Weakening Rate Correlation: Dollar Decouples from Policy Pace
Historically, there was a strong positive correlation between the dollar and U.S. Treasury yields, but recent data indicates a significant decline in their synchronicity. The 60-day correlation coefficient between the Dollar Index and the two-year U.S. Treasury yield is only 0.55, far below pre-pandemic normal levels.
Notably, in May, their rolling correlation even briefly turned negative, demonstrating the dollar's gradual detachment from an "interest rate-driven" logic.
A similar phenomenon is occurring with long-term rates. The correlation between the Dollar Index and the 10-year U.S. Treasury yield remains around 0.55, with several instances of divergence this year. Analysts believe this reflects a structural change in the market: capital flows, international trade settlement structures, and safe-haven asset allocations are becoming new variables affecting dollar fluctuations.
Strengthening Signs of Gold and Dollar Decoupling
The gold market has become a new window for observing dollar trends. Although traditional views hold that gold prices inversely relate to the dollar, this negative correlation has been weakening in recent months.
Statistics show that the 60-day rolling correlation coefficient between gold and the Dollar Index is about -0.45, indicating significant volatility compared to the stable range of the past two years. Analysts point out that global capital allocation to precious metals has broadened beyond hedging against dollar depreciation, increasingly considering geopolitical risks, global inflation, and sovereign debt risks.
Gold prices have surged over 60% this year, reaching historical highs, while the simultaneous weakening of the dollar further accelerates structural reallocations by investors—funds are flowing from dollar assets to gold, yen, and emerging market currencies.
The Dollar May Face Long-term Valuation Adjustments
From a valuation perspective, the dollar is significantly overvalued. According to the OECD's Purchasing Power Parity model adjustments, the Dollar Index is currently around 43% above its long-term fair value.
The 10-year moving average indicates a long-term support level at 98.50 for the dollar, while the 20-year average is just 90.35. This suggests the dollar remains in a historically high range, with potential for further correction.
Based on the Fibonacci retracement model, the Dollar Index is currently at the 38.2% retracement level around 98. Should it further decline to the 50% retracement level of 92.75, it would imply about 6% more downside; reaching the 61.8% level of 87.50 could mean a potential drop exceeding 11%. This scenario is conceivable in the context of continuous monetary easing.
Global Currency Landscape May Undergo Restructuring
Several international investment banks believe the dollar may be nearing the end of its "supercycle." Morgan Stanley notes that the dollar's strength over the past two decades was built on high interest differentials and its status as an international reserve, but the current U.S. economic slowdown, widening fiscal deficits, and frequent geopolitical conflicts are eroding the dollar's core support.
Meanwhile, China, India, and Middle Eastern countries are accelerating the development of their local currency settlement systems, and the Eurozone is exploring the integration of a digital euro and cross-border payment mechanisms. The multipolar trend challenges the dollar's era of dominance.
Goldman Sachs' forex strategy team summarizes: "The dollar is unlikely to collapse quickly, but its long-term hegemony is being eroded by multiple forces. Over the next decade, the global currency landscape may transition from a unipolar system to multipolar competition."
Against this backdrop, the dollar's 12.5% drop may not just be a cyclical adjustment but could also herald shifts in the international financial order.
