Are claims of dollar weakness overblown?
The Financial Times and Bloomberg both ran headlines on 30th June reporting that the US dollar had suffered its worst start to the year since 1973. The ICE US dollar index fell by 10.8% in the first half of 2025. We would argue that this claim is misleading, and that the extensive commentary accompanying this essentially meaningless statistic likely reveals the commentators’ political biases rather than any genuine economic insight.
Let’s begin with the 10.8% figure. This is based on an index of six currencies – sterling, euro, Swiss franc, Swedish krona, Canadian dollar, and the yen. The chart below shows the historical trajectory of the ICE US dollar index. Although not entirely random (there appears to be some degree of trending) its movements have generally stayed within ±15% of the starting point. In financial markets terms, that makes it look remarkably stable.
Source: New York Times
The ICE US Dollar Index was originally created to represent the US’s main trading partners in 1973. While there is a large and liquid futures and options market based on this index, the currencies included no longer reflect the US’s principal trading partners. Consequently, its economic relevance is now significantly diminished. Over any meaningful time period, the index shows no sign of crisis. In fact, it simply appears to be mean-reverting from a relatively high level.
The ICE US Dollar Index. Source: Financial Times
A more accurate gauge of US dollar strength is the Nominal Broad US Dollar Index, compiled by the Federal Reserve. This incorporates 2019 US trade and service data to weight the currency components. While the euro and Canadian dollar remain key constituents, the index also includes currencies from major US trading partners such as China, Mexico, South Korea, and India, with weightings reflecting their respective importance. This more representative index also suggests the dollar is reverting towards its long-term average from a recent high.
Source: St Louis Federal Reserve
That has not stopped some commentators from displaying their biases and exaggerating the implications of the recent dollar decline. The most vocal Trump critics are often found among those predisposed to oppose the US administration, and academics are no exception. The FT quotes Anna Cieslak of Duke University: “Fiscal deficits, deliberate government actions to shrink the US financial account and devalue the dollar, uncertainty about succession at the Fed and questions about Fed independence all negatively affect [the safe haven status of the dollar].”
The tone of this comment is clear, although what shrinking the US financial account refers to is not, nor why it might be bad for the US dollar, nor whether the administration is deliberately seeking devaluation. The FT also quotes an ING FX strategist saying that “The dollar has become the whipping boy of Trump 2.0’s erratic policies,” giving away a personal political bias.
Trump 2.0 has been erratic, and he has challenged the Federal Reserve to reduce its interest rates. This has perhaps contributed to a part of the mean reversion we have seen above. Other financial strategists suggest, without any real evidence, that demand for US Treasuries has fallen and caused some US dollar weakness, although those working finance tend to overestimate the importance of the industry they work in.
Another possible cause of dollar weakness has been the deterioration in the current account in the first months of the year. The deficit widened by over 40% in the first quarter of 2025 compared with the same period in 2024, driven by increased imports of gold, consumer goods, and pharmaceuticals. This may reflect businesses front-loading imports ahead of the tariffs announced in April. If that’s the case, the current account could normalise once those tariffs come into effect.
Prediction is very hard, particularly when it is about the future, but it does seem that the sensational headlines about US dollar weakness are overstated. What this episode does illustrate is that investment portfolios should own a number of currencies to reduce the risk of being hurt by sudden moves. We generally recommend that investors hedge foreign exchange risk in lower-risk bond holdings to preserve their defensive nature, while holding a globally diversified set of equities across multiple currencies so that weakness in one region can be offset by strength elsewhere.
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