The U.S. dollar is undergoing its most severe devaluation in over half a century, a historic shift that is reshaping global investment, trade, and economic policy . After a 15-year period of general strength, the dollar index, which measures the currency against a basket of its major peers, fell approximately 11% in the first half of 2025 . This marks the worst six-month performance for the dollar since 1973 .
Although the currency rebounded slightly in July and has seen recent gains, climbing to around 98.5 on the index in early October, analysts at major financial institutions like Morgan Stanley believe the downward pressure is not over . They estimate the dollar could lose another 10% of its value by the end of 2026 . This decline is triggering a broad recalibration of investment portfolios and raising questions about the future landscape of the global economy.
The drop ends a structural bull cycle for the dollar that began in 2010 and produced accumulated gains of about 40% . The sudden reversal has been driven by a confluence of factors. These include shifting expectations for U.S. economic growth, policy uncertainties surrounding tariffs and the Federal Reserve, and concerns over the nation's public debt .
A key driver has been a changed view on U.S. growth outperformance. The initial market consensus after the 2024 election anticipated strong economic expansion. That view shifted significantly in April 2025 with announcements on trade policy, introducing widespread uncertainty . Morgan Stanley Research now estimates U.S. growth will slow to 1.5% in 2025 and 1% in 2026, a notable deceleration from the 2.8% growth seen in 2024 .
Monetary policy is also a fundamental factor. The Federal Reserve is expected to reduce interest rates from their current range to as low as 2.5% by the end of 2026 . Because rate differentials are a primary driver of currency strength, the convergence of U.S. rates with those of other major economies makes the dollar less attractive to global investors . Recent data showing economic softness, including a modest jobs report, have increased expectations for these rate cuts, adding to the dollar's weakness .
Political and fiscal risks are also weighing on the currency. Sensitivity to headlines, including debates about the independence of the Federal Reserve leadership, has caused sharp, immediate drops in the dollar's value . Furthermore, fiscal worries are growing due to the large price tag of government spending and a mixed revenue outlook . The ongoing U.S. government shutdown, which began in late September 2025, has further clouded the economic picture. Historically, government shutdowns have corresponded with a weaker dollar, particularly against safe-haven currencies like the Japanese yen and Swiss franc .
The behavior of foreign investors offers a critical window into the dollar's potential future. Foreign entities own more than $30 trillion in U.S. assets . For years, many of these investors, particularly in Europe, chose not to hedge their dollar exposure, reflecting a belief that the currency would continue to appreciate. Now, that view is changing. Investors are increasingly adding foreign exchange hedges to their U.S. asset holdings. This hedging activity effectively means selling dollars, creating a long-term flow that could push the currency's value down even further .
There is also a noticeable shift in global capital allocation. While long-term holdings of U.S. assets remain substantial, flows into U.S. equities have weakened significantly in 2025 . European investors, for instance, are allocating more capital to local assets. European-focused ETFs have received record net flows this year, a rebalancing trend that reduces demand for dollars and may continue to pressure the currency .
The declining dollar is having wide-ranging effects on consumers, businesses, and markets. For American consumers, a weaker dollar makes international travel more expensive and increases the cost of imported goods, which can put upward pressure on inflation . U.S. investors who own assets denominated in foreign currencies may see gains, but those holding dollar-denominated assets face challenges .
On the positive side, American exporters stand to benefit. A weaker dollar makes U.S. goods and services less expensive for foreign buyers, potentially boosting sales for companies that sell abroad . The performance of international investments has also been notable. The MSCI EAFE index, which tracks developed market stocks outside of the U.S. and Canada, had returned 22% year-to-date, with a significant portion of that gain—about 10%—attributed solely to the weaker dollar .
As the dollar weakens, investors are seeking alternatives to preserve value. So-called "hard assets" like gold, silver, and Bitcoin have seen increased demand and have hit record highs . Ken Griffin, CEO of Citadel, described this trend as a "debasement trade," with substantial capital moving away from the dollar as investors look to reduce their exposure to U.S. sovereign risk .
This trend coincides with a gradual decline in the dollar's role as the world's primary reserve currency. Its share of global central bank reserves fell to 56.3% in the second quarter of 2025, the lowest level since 1994 . Some analysts warn that at the current pace, the dollar's share could fall below 50% within five years .
Despite these pressures, most experts believe the dollar's position as the world's dominant currency is not in immediate jeopardy. The United States remains the world's largest, wealthiest, and most competitive economy . The dollar's status is underpinned by a lack of viable alternatives, the depth and liquidity of U.S. financial markets, and institutional trust . While its share of global reserves may slowly decline as central banks diversify, the dollar is far from being replaced as the main currency for international trade and finance .
Looking ahead, the path of the U.S. dollar will be shaped by the evolution of U.S. economic growth, the Federal Reserve's interest rate decisions, and the resolution of policy uncertainties, including the government shutdown and ongoing trade negotiations . As one strategist put it, the market is likely at an "intermission rather than the finale" for the dollar's weakening trend, with a second act of depreciation possible in the next 12 months .