Dollar Suffers Largest Six-Month Decline in Half a Century
By the end of June this year, the dollar had depreciated by 10.7% against major global currencies, marking its worst half-year performance since the collapse of the Bretton Woods system in 1973. Mid-year, the dollar fell to its lowest point since February 2022, underscoring ongoing pressures from the U.S.'s massive fiscal deficit, policy uncertainty, and potential Federal Reserve interest rate cuts.
B. Riley Wealth Management's Chief Market Strategist Art Hogan noted that this downward trend is not a random event but is driven by high U.S. debt, diplomatic tensions, and expectations of rate cuts, forming a downward momentum that is hard to reverse.
Although the dollar saw a short-term rebound in April due to market expectations that the Trump administration might slow down tariff imposition, the general pattern of dollar weakening since mid-January remained largely unchanged, raising further questions about the U.S. economy and the dollar's dominant status.
Central Banks Accelerate Gold Purchases Amid Dollar Reduction
With U.S. public debt nearing $30 trillion and fiscal deficits projected to reach close to $2 trillion by 2025, the allure of dollar assets continues to diminish. According to data from the World Gold Council, central banks are currently buying an average of 24 tons of gold monthly, marking the strongest first-half purchase levels since 1979, indicating an accelerated trend of "de-dollarization."
Bank of America analyst Lawson Winder stated that the main reasons central banks are buying gold are to diversify foreign exchange reserve structures, reduce dependence on the dollar, and hedge against economic and geopolitical risks. "This trend is expected to continue," he added.
In a report, research firm TS Lombard referred to the dollar as a "gift that continuously provides trading opportunities," maintaining short positions on the dollar, reflecting that some investors have adopted clear strategies to address the risks of a declining dollar.
Rate Cut Expectations Could Intensify Dollar Downward Pressure
Whether the Federal Reserve will resume interest rate cuts in the second half of the year has become a focal point of market attention. If policy shifts towards dovishness, it will further escalate depreciation pressure on the dollar. Although following the Federal Reserve's last rate cut in 2024, the dollar and U.S. Treasury yields unexpectedly rose, the dollar's trajectory faces challenges as market expectations adjust.
Latest interest rate swaps data indicates that investor bets on a September rate cut by the Federal Reserve are intensifying, creating a link with potential further dollar pressure. Analysts suggest that if a rate cut cycle begins, the yield curve on U.S. Treasuries may flatten, further decreasing the attractiveness of dollar assets.
Opposing Views Persist with Some Institutions Remaining Optimistic about the Dollar
Despite the dollar's continued depreciation causing market concerns, some institutions still believe the dollar's core position is difficult to shake. Thomas Matthews, head of Asia-Pacific markets at Capital Economics, pointed out that the rebound in U.S. stocks indicates global capital still has confidence in U.S. assets, with the dollar's decline largely attributed to the appreciation of other currencies and short-term hedging operations.
Jennifer Timmerman, an analyst at Wells Fargo, emphasized that the dollar's role as the dominant currency for global payments and trade settlements remains solid. The stable legal environment, market depth, and liquidity in the U.S. provide significant advantages that make the dollar hard to replace.
