The U.S. dollar has shown signs of stabilization over the past two months following a historic decline earlier this year. Despite this recent stability, many foreign exchange market participants remain skeptical. They view the current situation as more of a temporary pause in the dollar’s downward trajectory rather than a shift towards recovery.
In the first half of 2025, the U.S. dollar index saw its most significant drop since the Nixon era, plummeting nearly 11%. Although the dollar has stabilized lately, short-selling positions in dollar futures have significantly decreased. Recent data from the U.S. Commodity Futures Trading Commission revealed a drop in speculative net short positions, which were just $5.7 billion—down from around $21 billion at the end of June.
Looking ahead, the Federal Reserve is expected to reinstate its interest rate cut cycle, leading many in the market to speculate that the dollar’s stabilization is temporary. Concerns persist regarding the U.S. fiscal and trade deficits, a softening labor market that could compel more substantial rate cuts, and global fund managers rethinking their currency hedging approaches to minimize exposure to the dollar.
Francesca Fornasari, Head of Currency Solutions at Insight Investment, remarked on the dollar’s persistent downtrend, predicting that the process would be tumultuous and noisy. Experts are increasingly aware that the factors that contributed to the dollar’s decline earlier this year— including scrutiny over American economic exceptionalism, worries about growth linked to protectionist trade policies, and ongoing structural deficits—remain in play.
Moreover, disappointing U.S. labor data may offer the Federal Reserve more justification for aggressive interest rate reductions, which would further weaken the dollar’s appeal in the global market. Paresh Upadhyaya, Head of Fixed Income and Currency Strategy at Amundi, has expressed a consistently bearish outlook on the dollar and anticipates that it may continue to lose ground as the Fed likely reduces rates through the end of the year.
The U.S. dollar’s recent performance has also influenced global investors, many of whom have begun to reduce their allocations to U.S. assets amid tariff disputes and evaluation of hedging strategies. Foreign holdings of U.S. assets are significantly high, and a shift in these investments could exert additional pressure on the dollar.
Upadhyaya emphasized that if foreign investors act on these reassessments, the dollar could face another wave of declines. The weak performance of the dollar earlier this year has prompted asset management firms to hasten their hedging strategies, which typically involve forward contracts or swap transactions to mitigate exposure.
As interest rates in the U.S. are set to go lower, the cost of hedging may decrease, making these strategies more attractive for foreign investors. George Saravelos, Global Head of FX Research at Deutsche Bank, noted that further rate cuts would likely incentivize even more proactive hedging by foreign investors, heightening potential dollar weakness.
Furthermore, industry insiders suggest that the current U.S. administration’s stance, while publicly professing a commitment to a strong dollar, may not actively oppose a drop in the dollar’s value. Thanos Bardas from Neuberger Berman highlighted that the government remains focused on enhancing American manufacturing, a goal that contradicts a strong dollar strategy. He predicts fluctuations for the dollar index between 95 and 100 in the near term, while current trading values hover around 97.62.
Shaun Osborne from the Bank of Nova Scotia reiterated that although the U.S. government might not explicitly signal a desire for a weaker dollar, it is unlikely to stand in the way of its decline. He expects the dollar to depreciate by an additional 5% to 7% against major non-U.S. currencies over the next year.
Upadhyaya further assessed the dollar’s recent exchange rate, characterizing it as neutral but still positioned for potential declines. He cautioned that the bear market for the dollar still holds significant room for additional downturns.
