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10 Themes - #8: U.S. dollar under pressure, but that’s not the end
10/11/2025
The greenback is caught between tactical shifts and structural anchoring.
Since the beginning of the year the U.S. dollar has lost around 7% of its value, as measured by the broad dollar index, prompting speculation about a potential “de-dollarisation” of the global economy.[1]
The dollar's pronounced weakness in spring 2025 was less a reflection of structural capital flight and more a consequence of technical factors. According to the Bank for International Settlements, the key role was played by currency hedging by non-U.S. investors.[2]
However, it is noteworthy that the dollar has not yet recovered sustainably following its period of weakness in the first half of the year. Rather than a clear counter-movement there has been more or less a sideways trend since then, which may suggests that market participants are still waiting for clarity on monetary policy and fiscal discipline.
Trade-weighted dollar still trading clearly above its long-term average
Trade-Weighted U.S. Dollar Index;
Sources: Bloomberg Finance L.P., DWS Investment GmbH as of 11/3/25
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At the same time it appears that market participants are not questioning the dollar across the board, but rather reacting in a differentiated manner. Expectations of cuts to U.S. interest rates have triggered tactical shifts, including in favor of assets that are seen as more independent of policy-makers, such as gold and cryptocurrencies. This dynamic may be less an expression of a paradigm shift than of short-term uncertainty. In our view, the credibility of the Fed remains in place and an important factor where the dollar’s prospects are concerned.
In the long term the liquidity the dollar offers and U.S. institutional stability may help support the dollar's role as a reserve currency. As long as no alternative offers the same functionality, liquidity and legal certainty, the dollar's primacy is likely to remain intact, in our view. The discussion about stablecoins does little to change this; they merely seem to reflect the need for digital liquidity rather than a structural replacement for the dollar.
The so-called “debasement trade,” i.e. the search for scarce, politically independent assets to hedge against U.S. inflation, policy credibility, fiscal and debt risks, has become a common strategy. In our view, gold seems to fulfill this role effectively. Crypto assets, however, remain a highly volatile addition.
“We are not seeing a collapse of the dollar system here, but rather a valuation premium within the existing fiat system,” says Xueming Song, currency strategist at DWS. “The dollar appears cyclically vulnerable, but we believe remains structurally anchored.” Currently, short- and medium-term factors such as hedging costs and political risks seem to be influencing the direction of the currency without eroding its fundamental framework.
The debasement trade appears to be a reaction to interest rate, fiscal deficit and U.S. credibility risks. But the swan song for the dollar seems premature. As long as U.S. institutions remain solid the dollar is likely to remain the most liquid unit of settlement and the central medium of security for global financial flows.
CIO Special_Theme 8 U.S. dollar under pressure, but that’s not the end
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