The US dollar index has entered a downward cycle and what impact will it have?

As global central banks reduce their holdings of US bonds, institutional funds have been massively "diversifying away" from the US, and Trump has attempted to intervene in the Federal Reserve, the once indispensable US dollar is undergoing an unprecedented "revaluation". In the first half of 2025, US President Trump vigorously waved the tariff saber, aiming to reshape the US advantage through a "strong dollar". However, contrary to expectations, as of June 27th, the US dollar index (DXY) has fallen by more than 10% within the year, marking the largest decline since 1986. As of July 1, 2025, the US dollar index has continued to weaken, once falling below the 97 mark, at 97.16, with the lowest point reaching 96.97, a new low since March 2022, and having dropped by approximately 10% since the beginning of the year. Technical indicators show that the US dollar index has broken through several key moving averages, with the bears taking the lead. Michael Metcalf, the global macro strategy director of Bank of Wealth, said: "The US dollar seems to be in a certain structural decline." Data from State Street Bank shows that investors' pessimistic view of the US dollar has reached the highest level since the outbreak of the pandemic. In the words of the banking industry, it is "selling off".

Some experts predict that the US dollar index is likely to show a trend of fluctuation and downward movement for a long time in the future, and the downward period may last for 6-7 years or even longer. Its impact is complex and multi-faceted. One is the impact on the economy. The downward movement of the US dollar index will lead to a reduction in the inflow of funds into the United States, even if there is a rate cut, the monetary environment in the United States is not loose. This will put pressure on the US financial market and the real economy, especially those industries and enterprises that rely on external financing. The downward movement of the US dollar index means that the exchange rate of the US dollar against other currencies tends to decline, which will further weaken the reserve currency status and asset attractiveness of the US dollar. The decline of the US dollar often accompanies market concerns about the economic outlook of the United States, and central banks may accelerate the reduction of US dollar assets and instead increase holdings of other currencies or safe-haven assets such as gold. The decline of the US dollar index may also trigger market concerns or optimism about the global economic outlook, thereby affecting the overall performance of the stock market. For example, if the decline of the US dollar is regarded as a signal of global economic recovery, then the stock market may be boosted; conversely, if the market believes that the decline of the US dollar reflects problems in the US economy, then the stock market may be under pressure.

The second impact is on the financial market. The downward movement of the US dollar index may lead to an increase in market volatility in global financial markets. And the reduction in the inflow of funds into the United States, even if there is a rate cut, the monetary environment in the United States is not loose. This will put pressure on the US financial market and the real economy, especially those industries and enterprises that rely on external financing. The depreciation of the US dollar may trigger market concerns about the economic outlook of the United States, leading to increased stock market volatility. At the same time, the decline in the yield of US dollar assets will also reduce the attractiveness of international capital, further intensifying the downward pressure on the stock market. The decline of the US dollar index will reduce the financing costs of emerging market countries and attract more international capital inflows. For emerging market countries, the decline of the US dollar index brings both opportunities and challenges. The opportunity lies in the possibility of attracting more foreign capital inflows and promoting economic prosperity. This will contribute to the development of the financial markets and the prosperity of the real economy in emerging market countries. In addition, the US dollar index is also typically negatively correlated with commodity prices. The rise in commodity prices will benefit resource-exporting countries, whose currencies may appreciate due to the rise in commodity prices, and their economies may also benefit from increased export income.

In conclusion, the US dollar index has entered a downward cycle, which will trigger a chain reaction in multiple fields. Investors need to closely monitor the transmission effect of exchange rate fluctuations on asset allocation, while seizing structural opportunities and strengthening risk hedging and diversified investment strategies to cope with the complex and volatile global financial environment.