Since the beginning of 2025, the Intercontinental Exchange (ICE) US Dollar Index has experienced its worst performance for the same period since 1973, declining by over 10% cumulatively in the first half of the year as it fluctuated downward from highs near 110 at the start of the year. This round of dollar depreciation is far from a simple repetition of historical cycles. Beyond the traditional backdrop of slowing economic growth and persistently high twin deficits, a series of policies from the Trump administration are also eroding confidence in the dollar, creating cracks in the long-standing "American exceptionalism" that underpins the dollar's hegemony. This depreciation, intertwined with policy uncertainty and a透支 of credit, not only breaks from the exchange rate logic dominated by past economic cycles but also touches on the restructuring of the international monetary system. Its trajectory is crucial for global capital flows and signals future shifts in the world's financial landscape.
In the first half of 2025, the ICE US Dollar Index (USDX) fell by more than 10%, marking its worst performance for the period since 1973. This depreciation is not a simple replay of historical cycles. In addition to the traditional context of slowing economic growth and high trade and fiscal deficits, policies from the Trump administration are eroding the foundation of dollar confidence from multiple dimensions—political and economic—causing fissures to appear in the "American exceptionalism" that has long supported the dollar's霸权. This article examines historical dollar depreciation cycles, analyzes the unique logic and impact of the depreciation since 2025, and offers an outlook on its medium- to long-term trajectory.
The ICE Dollar Index, with its base period set to March 1973, covers six major developed economy currencies, including the Euro, Japanese Yen, and British Pound. Its weights are based on 1973 trade share proportions. Due to its long-term data coverage, focus on core currencies, and stable weighting, it serves as a key tool for analyzing dollar cycles. Since 1971, the index has experienced three major depreciation cycles, all primarily driven by cyclical economic factors and exhibiting distinct characteristics of their eras.
The first cycle (1971-1978) was divided into two stages, with the core driver shifting from international monetary system restructuring to domestic economic woes. The initial stage (1971-1973) stemmed from the inherent contradictions of the Bretton Woods system—the Triffin dilemma. The "dual peg" mechanism established in 1944 required the US dollar to maintain a fixed parity with gold while providing global liquidity through trade deficits. However, influenced by factors like the Marshall Plan and the Vietnam War, the US fiscal deficit widened, and the money supply surged, causing global dollar liabilities to grow much faster than gold reserves. Concurrently, as countries relaxed capital controls, short-term capital flows intensified, and US gold reserves fell by approximately 57% between 1958 and 1972. In 1971, the Nixon administration closed the "gold window," suspending dollar convertibility into gold, and by 1973, countries had largely shifted to floating exchange rates, with the dollar index falling from around 120 in early 1971 to near 90 by July 1973. The second stage (1973-1978) was hampered by stagflation and Federal Reserve policy missteps. Following the first oil crisis, the US was mired in "high inflation and low growth," with inflation exceeding 10%. The Fed vacillated between loose and tight policies, failing to address the economic slowdown while exacerbating inflationary pressures and widening interest rate differentials with other economies. By October 1978, the dollar index had fallen to around 82, a cumulative depreciation of about 32% from early 1971.
The second cycle (1985-1995) was also split into two stages, featuring a combination of policy intervention and weakening economic fundamentals. The first stage (1985-1987) involved a managed depreciation actively pursued by the US. In the early 1980s, aggressive Fed tightening pushed interest rates higher, attracting foreign capital inflows that strengthened the dollar and widened the trade deficit. In September 1985, the US, Japan, West Germany, and other nations signed the Plaza Accord, jointly pushing for dollar depreciation to improve the US trade imbalance. The dollar index fell rapidly from its historical peak of 164 in February 1985 to around 85 by the end of 1987. Following the Louvre Accord in February 1987, the dollar stabilized briefly but continued its depreciating trend afterward. The second stage (1987-1995) was characterized by a被动 depreciation driven by economic weakness. From 1987 to 1991, US real GDP growth slowed from 3.5% to -0.1%. The Fed initiated an interest rate cutting cycle to counter the economic downturn,加剧 capital outflow pressures. By April 1995, the dollar index had dropped to around 80, a cumulative depreciation of approximately 51% from its 1985 high, marking the largest decline among the three cycles.
The third cycle (2001-2011) was deeply intertwined with two major crises. The first stage (2001-2007) began with the dot-com bubble burst and the 9/11 attacks, plunging the US into recession; the quarter-on-quarter annualized real GDP growth rate fell to -1.6% in Q3 2001. Concurrently, US fiscal and trade deficits widened, and the birth of the Euro diverted demand for dollars. The US share of the global economy fell from 31% in 2001 to 25% in 2007, and the dollar index dropped to around 81 by the end of July 2007. The second stage (2007-2011) was impacted by the subprime mortgage crisis and the global financial crisis. After the subprime crisis erupted in August 2007, the dollar index fluctuated downward, falling to around 71 by July 2008. Although safe-haven flows initially caused a brief dollar rally, the Fed's quantitative easing policies led to a liquidity glut, and coupled with a slower US economic recovery compared to other major economies, the dollar fell back into a depreciating trend. By the end of 2011, the dollar index hovered around 79, down about 34% from its June 2001 peak.
Since 2011, the dollar index has experienced its longest-ever super-strong dollar cycle, accelerating its gains in Q4 2024 driven by the "Trump trade" and rising to near 110 in January 2025. However, after Trump's return to the White House, the dollar index reversed sharply, falling 4.0% in Q1 and 6.7% in Q2, for a cumulative decline of 10.8% in the first half of the year. The driving logic behind this differs fundamentally from historical cycles.
The core difference from historical cycles lies in its non-economic endogenous drivers. The three historical depreciation cycles, even when policy factors intervened, ultimately reverted to a logic of correction based on economic fundamentals—whether stemming from imbalances in the balance of payments or differences in economic growth rates. The depreciation since 2025, however,集中体现了 the direct impact of Trump's personal policy style, blending characteristics of three historical policy approaches: tariff protection reminiscent of the Hoover administration, 'twin deficit' expansion echoing the Reagan era that weakens dollar credibility, and intervention with the Federal Reserve akin to actions during the Carter administration, leading to unstable policy expectations. This non-economic endogenous drive, centered on personal policy preferences, breaks the traditional model of "economic cycle dominance."
The foundation of dollar credibility is being damaged across four key dimensions. First, the political foundation is动摇 as alliance relationships suffer. The post-Cold War US alliance system and shared values were crucial guarantees for dollar hegemony. However, the Trump administration prioritizes a "reciprocal" transactional logic, imposing 10% "reciprocal tariffs" on allies like Australia and the UK, creating分歧 over issues like the Ukraine conflict and NATO defense, and demanding allies bear greater economic and security costs. As trust among allies erodes, they have begun building trade and security networks that exclude the US, undermining the political support for dollar credibility. Second, the capital recycling mechanism is断裂 due to tariff policy impacts. After the collapse of Bretton Woods, a dollar recycling mechanism formed: the US supplies dollar liquidity via trade deficits, and non-US economies recycle dollars by investing reserves in US Treasuries. In April 2025, Trump announced global "reciprocal tariffs." If trade deficits shrink, this would contract global dollar liquidity from the supply side. Simultaneously, unilateral tariff policies违背 international trade rules,类似 the 1971 "Nixon Shock," weakening global willingness to hold dollar assets from the demand side. Third, the根基 of independence is侵蚀 through intervention in Fed operations. The Fed's independence is a core pillar of the dollar's international credibility, ensuring monetary policy is free from short-term political interests. However, Trump has repeatedly publicly贬低 the Fed's professionalism, pressured for rate cuts, and interfered with personnel—contemplating firing Chair Powell and, in August 2025, dismissing Governor Lisa Cook (the first such dismissal since the Fed's founding in 1913), raising market concerns about the "politicization" of the dollar. Former Chairs Bernanke and Yellen jointly warned that interfering with Fed independence could cause lasting economic damage. Fourth, the safe-haven attribute is弱化 by膨胀 fiscal deficits. US Treasury debt,凭借 its depth and liquidity, is seen as the "ultimate safe asset," the core anchor of the dollar's safe-haven status. However, the Trump administration's "Big and Beautiful" Act raised the federal debt ceiling by $5 trillion in one go; by the end of 2024, the US outstanding debt-to-GDP ratio reached 121.52%. Declining investor confidence in Treasuries has led to rising term premiums, eroding their "safe asset" status and directly削弱 the dollar's safe-haven appeal.
Cracks are appearing in the ideology of "American exceptionalism," which holds that the US,凭借 its institutional advantages and economic resilience, is a long-term "safe haven" for global capital—a key支撑 for the dollar's resilience. Since 2025, two phenomena signal its光环 is褪色. First, the traditional stock-bond "seesaw" relationship has broken. Historically, US financial market stability was strong, often showing a complementary pattern where bonds fell and stocks rose during shocks. However, in H1 2025, against a backdrop of moderate inflation and subdued rate hike expectations, the US experienced five episodes of simultaneous stock, bond, and currency declines—the S&P 500 fell over 1%, the 10-year Treasury yield rose over 5 basis points, and the dollar index fell over 0.4%—the highest number since 2000. The core reason is Trump's policy uncertainty triggering systemic risk concerns. Second, capital is fleeing the dollar system. In traditional safe-haven scenarios, capital flows into dollars and US Treasuries. Yet, in April 2025, when the dollar index fell 4.4% in a single month, the Euro and Yen appreciated about 5% against the dollar, the Swiss Franc gained about 7%, and gold prices rose about 6%. US Treasury data showed that net international capital inflows in H1 2025 decreased by $202 billion quarter-on-quarter, with foreign investors reducing US stock holdings by $90.3 billion, indicating a下降 in global capital's risk appetite for dollar assets.
The Trump administration's expectation that dollar depreciation would improve the trade imbalance has not yielded the anticipated results. Theoretically, the impact of currency depreciation on trade is constrained by the J-curve effect and the Marshall-Lerner condition—export prices are hard to adjust in the short term, rising import costs may initially widen the deficit, and the sum of import and export demand elasticities must be greater than 1 to improve the balance of payments. In the first eight months of 2025, the broad real effective exchange rate of the dollar fell 5.6%, yet the US goods trade deficit increased 18.5% year-on-year and 10.1% quarter-on-quarter, with importers front-loading inventory restocking further加剧 the imbalance. Simultaneously, depreciation raises the risk of imported inflation. Goldman Sachs calculations show that, as of June 2025, US businesses and consumers bore 86% of the tariff costs, a proportion expected to rise to 67% by October. Without a significant drop in import costs, dollar weakness further pushes up inflationary pressures. The Congressional Budget Office has already lowered its 2025 economic growth forecast and raised its inflation and unemployment expectations, signaling the US might be heading toward early-stage stagflation.
In July 2025, positive US economic data, phased progress in trade talks, and hawkish signals from the Fed contributed to a 3.4% rebound in the dollar index. However, weak August non-farm payrolls data and dovish comments from Chair Powell prompted a回调. After the Fed cut rates twice in September-October, the dollar index fluctuated upward due to hawkish guidance and weakness in other major currencies, returning to the 100 level in early November and closing at 99.28 on November 14, down 8.5% year-to-date.
Overall, the dollar's rebound relies on short-term factors and lacks a solid foundation. Under the Fed's "data-dependent" decision-making framework, volatility in key data like employment and inflation can trigger adjustments in rate cut expectations, causing the dollar index to fluctuate反复. Market uncertainty about the prospects for a US economic "soft landing" further amplifies short-term volatility risks.
From a valuation perspective, the dollar still has significant room to fall. Historically, the ICE Dollar Index has mostly fluctuated between 80 and 110, typically falling below 90 during depreciation cycles and reaching near 70 during the 2008 financial crisis. Currently, the Bank for International Settlements measure of the dollar's real effective exchange rate is near a historical high of around 108 (since records began in 1994), significantly above its historical average, suggesting substantial pressure for valuation regression.
From an international environment standpoint, the multipolarization of the monetary system is accelerating. As of the end of Q2 2025, the global share of dollar reserves stood at 56.3%, below 60% for the 11th consecutive quarter and down 14.9 percentage points from Q1 1999. Meanwhile, the trend of gold remonetization is evident. By the end of June 2025, the market value of global official gold reserves was approximately $3.88 trillion, exceeding the value of US Treasury holdings in global dollar foreign exchange reserves at that time. By the end of 2024, gold reserves had surpassed the Euro to become the second-largest reserve asset, with a 20% share. A World Gold Council survey showed that 95% of responding central banks expect to increase gold reserves in the next year, and 73% believe the dollar's reserve share will decline over the next five years.
In the medium to long term, the dollar's path will be influenced by cyclical economic factors but depends more critically on the extent and direction of adjustments to Trump's policies. Driven by a "mercantilist" logic and a "art of the deal" style, the反复性 and激进性 of policies will continue to侵蚀 dollar credit.
The "无常性" of tariff policy is a core risk. Although the US has signed trade agreements with the EU and Japan, the perceived inequality of these agreements has sparked widespread dissatisfaction, and their implementation remains uncertain. Comprehensive agreements with China, Canada, and others have not yet been reached. If后续谈判 fall short of expectations, Trump could impose new tariffs,加剧 global trade turmoil and削弱 the attractiveness of dollar assets. Yale University data suggests tariff policies could reduce US real GDP growth by 0.5 percentage points annually in 2025-2026 and increase the unemployment rate by 0.7 percentage points by the end of 2026; weakening economic fundamentals would directly压制 dollar performance.
The Fed's independence faces ongoing challenges. In H2 2025, the Trump administration's intervention shifted from "verbal pressure" to "substantive actions." If it gains control of a majority on the Fed Board of Governors, it could end the tradition of independence dating back to 1951. Should markets fully price in the risk of "Fed decisions being subservient to political interests," dollar credibility would suffer a systemic shock.
Fiscal deficits and debt expansion risk瓦解 the dollar's "safe anchor." The Congressional Budget Office projects the "Big and Beautiful" Act will add $3.4 trillion to the fiscal deficit over the next decade. Meanwhile, the legality of Trump's tariffs is under review by the US Supreme Court; if the tariffs are overturned, tariff revenue could be $2.4 trillion lower over ten years. In the medium to long term, the risk of a Treasury supply-demand imbalance加剧. If the "risk-free asset" label失效, global capital could accelerate its flight from dollar assets.
The dollar depreciation since 2025 results from the combined effect of cyclical economic factors and the shock of Trump's policies. Its core characteristic is the systemic erosion of the dollar's credibility foundation, marking an essential difference from historical cycles. Although the dollar index shows a pattern of反弹 and回调 in the short term, medium- to long-term pressures for depreciation are likely to persist due to high dollar valuation, the advancing multipolarization of the international monetary system, and the ongoing impact of Trump's激进 policies.
If the Trump administration moderates its激进 style, stabilizes tariff expectations, ceases interference with Fed independence, and reinstates fiscal discipline, the dollar's weakness could be a temporary episode. As信心 in its credit修复, the dollar could return to a relatively stable range. However, if it continues on a policy path of "透支信用," allowing tariff unpredictability, compromised central bank independence, and expanding fiscal deficits to fester, the dollar weakness seen since 2025 will likely evolve into a long-term trend, potentially动摇 the dollar's core position in the international monetary system. Global financial markets are facing a credit restructuring triggered by policy uncertainty, and the "exceptional"光环 of dollar霸权 is gradually褪色.