The defining narrative in the foreign exchange market for 2025 is a tug of war between “US exceptionalism – US dollar strong” and “US debasement – US dollar weak”.
At the start of 2025, market consensus leaned heavily toward a bearish outlook for the US dollar, anchored on the new Trump administration’s aggressive fiscal agenda. Deep corporate tax cuts were expected to further widen the US budget deficit, raising concerns over heavier Treasury issuance, weaker demand for US sovereign debt, and upward pressure on long-term yields—dynamics that underpinned the “US Debasement” trade narrative.
This view was reinforced by erratic US trade policy execution, which unsettled global markets. The announcement of sweeping “Liberation Day” tariffs on 2 April 2025 amplified fears that the administration might tolerate—or even encourage—a weaker dollar to enhance US export competitiveness as part of its ambition to reindustrialize the economy around high-tech manufacturing.
Against this backdrop, the US Dollar Index slid sharply by 11.5% in the first half of 2025 (1 January to 1 July) (see Fig. 1). The sell-off then stalled as the “US exceptionalism” narrative resurfaced, driven by widening monetary policy divergences between the Federal Reserve and other major developed-market central banks.
Into the third quarter, the Fed adopted a “wait-and-see” stance amid sticky inflation and a still-resilient US services sector. In contrast, the ECB and BoE struck a more dovish tone as the euro area wrestled with waning confidence tied to Germany’s industrial slowdown, while the UK faced stagflationary pressures. At the same time, commodity-linked currencies suffered a sharp terms-of-trade shock from renewed US-China geopolitical tensions, weighing on the CAD, AUD, and NZD.
The Japanese yen also remained under pressure despite inflation running above 2%, constrained by the Bank of Japan’s limited ability to normalise policy decisively amid political and administrative gridlock. With “US exceptionalism” back in focus, the US Dollar Index retraced part of its losses, narrowing its year-to-date decline from 11.5% to 8.4% between 1 July and 31 July (see Fig. 2).
That rebound proved short-lived. On 22 August 2025, the Fed’s guidance pivoted decisively dovish when Chair Powell, speaking at the Jackson Hole Symposium, warned that a weakening US labour market posed risks to growth. The dollar subsequently resumed its decline but failed to break the 1 July 2025 low, entering a sideways consolidation.
As of 29 December 2025, the US Dollar Index was down 10.3% year-to-date, reflecting the Fed’s more balanced policy stance even as it resumed easing in September with three 25 bps rate cuts, lowering the fed funds rate to 3.5%–3.75% from 4.25%–4.5%.
Below is a summary table highlighting the 2025 performance of key currencies and their main drivers.