US dollar had its worst H1 in 50 years; What happened?

2 Jul 2025 , 09:20 AM

A DUBIOUS DISTINCTION FOR THE US DOLLAR

The just concluded first half of 2025 (H1-2025) held a dubious distinction for the US dollar. It delivered its worst performance since 1973, when the Arab oil embargo battered the dollar. Look at the dollar index (DXY) to understand what is happening. In January 2025, the dollar index was hovering at 110 levels. By end of June 2025, the dollar index is at 96.72 levels.

That is a sharp fall of -12.1% in the dollar. The dollar index is the value of the dollar against a basket of hard currencies globally. This is also evidenced by the respective exchange rates. The USDEUR and the USDGBP are at 42-month lows, which shows the extent of pain in the dollar. But, what exactly has gone wrong with the US dollar and why does it matter?

WHY A WEAK DOLLAR MATTERS TO THE WORLD?

Any currency is a barometer of the trade, flows, and the economy. When it comes to a major currency like the US dollar; it is also about confidence that businesses and investors have in the dollar. The numbers are staggering. For instance, the US economy accounts for 25% of global GDP and 54% of global exports are still denominated in US dollars.

In addition, 60% of bank deposits and 70% of international bonds are also denominated in US dollars. Above all, 57%-60% of the central bank reserves are denominated in US dollars. Much of the global trade and financial system runs smoothly because world has confidence in the US dollar. Today, that confidence in the dollar has come into question. Here is why.

WHY HAS DOLLAR CONFIDENCE COME INTO QUESTION?

There are several reasons for the recent loss of confidence in the US dollar; which includes growth concerns, inflation concerns, and policy related concerns. Here is a quick dekko.

• The biggest concern is; growth. The IMF has already cut the forecast for US GDP growth from 2.4% to 1.6%. To add to the woes, the first quarter of 2025 saw the US economy contracting by -0.5%, although it is attributed to front-loading of imports.
• The second big concern is inflation. Even as the food and fuel inflation appear to be in control, the core inflation remains elevated. That has kept the headline inflation well above the Fed target. Higher inflation will not allow the Fed to cut rates to spur growth; and at the same time, it will depress the real GDP growth.
• The third concern, pertains to the stand-off between the US government and the Federal Reserve. Trump has been calling for rate cuts to spur growth, but Jerome Powell does not see the need to cut rates. However, after the Q1 GDP contraction, these differences are likely to get more pronounced. That is also unnerving currency markets.
• The fourth and biggest concern is the One Big Beautiful Bill Act (OBBBA). This bill entails the government spending trillions of dollars, even as it cuts taxes and cuts back on healthcare support. The US debt to GDP is already at 124% and OBBBA will worsen the budget deficit and debt levels. That is a major factor that is unnerving currency traders.

At a more conceptual level, investors are also worried that the US may be gradually losing its influence as the decisive voice in global matters. That could still be debatable.

WHY DOES A WEAK DOLLAR MEAN FOR INDIA?

Ironically, even as the dollar has weakened, the USDINR continues to hover above ₹85.50/$. While the rupee has hardened from the lows of ₹87.50/$; India clearly has its challenges like valuations, capital outflows and growth concerns. However, a weaker dollar will be a major concern for Indian IT sector, which is the biggest contributor to the services surplus on the current account. These IT companies will face pricing pressure and lower tech spending.

This also applies to other exports of pharma products, chemicals, and auto ancillaries; where the weaker rupee will only help to pay for the higher US tariffs. India has one more reason to worry about. Since oil is denominated in dollars, a weak dollar is likely to boost oil prices in dollar terms. Overall, a weak dollar is something, India would just prefer to avoid!