The Dollar's 2025: Worst First Half Since 1973

Overview

The dominant story in currency markets over recent years has been dollar strength driven by interest rate differentials. That relationship reversed, and the reversal was among the sharpest on record.

The US dollar index fell 10.8% in the first half of 2025 — its worst first-half performance since 1973, when it dropped 14.8%. The decline was broad-based: 14.4% against the Swiss franc, 13.8% against the euro and 9.7% against the British pound.

The policy backdrop has also inverted. The Bank of Japan raised rates by 25 basis points in December to 0.75%, the highest level since 1995, while the Federal Reserve has been cutting toward a range around 3.00% to 3.25%.

That is a converging interest rate gap rather than a widening one — which matters because the differential is the mechanism through which capital flows between currencies. The engine said to be driving dollar strength is now running in the opposite direction.

Worst First Half Since 1973

A 10.8% decline in the dollar index over six months is a substantial move in a market where major currencies typically fluctuate by a few percent over comparable periods.

The historical comparison establishes how unusual it was. The only worse first half in the index's history came in 1973, at 14.8%, during the collapse of the Bretton Woods system when the dollar's convertibility to gold had recently ended.

That the closest analogue is a period of fundamental monetary system change indicates this was not ordinary volatility. It was a repricing of the dollar against every major counterpart simultaneously.

Where the Dollar Lost Most

The distribution across pairs shows the move was about the dollar rather than about strength elsewhere.

The largest fall was 14.4% against the Swiss franc, followed by 13.8% against the euro and 9.7% against the British pound. When a currency falls against every major counterpart at once, the common factor is the currency itself.

The Swiss franc result is the most informative. It is the classic safe-haven currency, bought when investors are nervous. A dollar falling hardest against the franc suggests capital moving toward safety and away from the dollar — which is notable given the dollar has traditionally been the safe-haven destination itself.

What Drove It

Two related factors have been identified as weighing on the currency: trade and tariff policy, and political pressure on the Federal Reserve to cut rates.

Trade policy affects currencies through several channels — expected growth, inflation, and the willingness of foreign investors to hold assets denominated in the currency. Tariffs create uncertainty about all three at once.

Pressure on central bank independence operates differently and is more consequential. A currency's value rests substantially on confidence that monetary policy will be set on economic grounds. Doubt about that premium is difficult to quantify and shows up in exactly this way — a broad, simultaneous repricing rather than a move against one counterpart.

The Rate Gap Is Converging

The mechanical driver of currency flows between major economies is the interest rate differential, and it has reversed direction.

The Bank of Japan raised its policy rate by 25 basis points in December to 0.75%, the highest since 1995 — a genuine landmark for an economy that spent decades at or below zero. Further increases have been anticipated.

The Federal Reserve has moved the other way, cutting toward a range around 3.00% to 3.25%. One central bank tightening while the other eases narrows the gap from both ends simultaneously, which is the fastest way for a differential to compress.

Why the Yen Story Reversed

The yen's weakness through the preceding years had a specific and well-understood cause: borrowing in a currency with near-zero rates to invest in one paying substantially more.

That carry trade works while the gap is wide and stable, and unwinds when it narrows. The position requires selling yen to establish and buying yen to close, so a narrowing differential does not merely reduce the incentive — it forces existing positions to reverse, generating yen demand.

Analysts have forecast USD/JPY settling around 140 to 145 by the end of 2026 on that basis. Forecasts are forecasts and should be treated as such, but the mechanism behind them is the same one that explained the yen's weakness — applied in the other direction.

Why Rate Differentials Drive Currencies

The underlying logic is worth stating because it explains why central bank meetings move currencies more than economic data usually does.

Capital seeks return. If one economy offers 5% on government debt and another offers 0.5%, investors buy the first currency to access the higher yield, bidding it up. The differential rather than the absolute level is what matters — a currency paying 3% against one paying 0.5% is more attractive than one paying 8% against another paying 7%.

This is also why expectations matter more than current rates. Markets price anticipated policy, so a currency can move sharply on a change in what a central bank is expected to do, before any rate has actually changed.

The Problem With Point-in-Time FX Levels

Currency analysis quoting specific exchange rates has a short shelf life, and readers encountering it later are usually misled.

Major pairs can move several percent within days on a policy surprise. An article stating a specific level is describing one moment, and by the time it is read the number may be wrong by more than the move it was written to explain.

Levels also invite a false impression of precision. Quoting a rate to one decimal place implies a measured fact, when what is actually being conveyed is a snapshot of a continuously trading market. Directional analysis and explanations of mechanism survive; quoted levels do not.

Why Declaring a Trade a Fallacy Is Risky

Currency commentary frequently concludes by dismissing a particular position, and the recent record illustrates the hazard.

The view that the dollar must eventually fall and the yen must eventually rise — the mean reversion trade — was widely characterised as mistaken while the rate differential was wide. The dollar then recorded its worst first half since 1973 and the Bank of Japan raised rates to a thirty-year high.

This is not evidence that the mean reversion view was right all along, and timing matters enormously in currency markets. It illustrates that the conditions underpinning a confident dismissal — in this case a persistently wide rate gap — can reverse faster than the analysis assumes, and that a currency regime described as entrenched is a description of the present rather than a forecast.

What Currency Analysis Can Tell You

Foreign exchange is among the hardest markets to forecast, and being clear about what analysis can offer is more useful than a directional call.

It can explain mechanisms reliably. Interest rate differentials drive capital flows, carry trades unwind when gaps narrow, and currencies fall broadly when confidence in their institutions weakens. These relationships are well established and they explain moves after the fact.

What it cannot do is predict timing. The differential between the dollar and the yen was wide for years before it narrowed, and anyone positioned for the reversal early would have been wrong for long enough to be painful. The mechanism was correct throughout; the timing was unknowable.

Which is why explanation is worth more than prediction here, and why an article quoting exchange rates as though they settle a question is offering the least durable part of the analysis.

Conclusion

The dollar index fell 10.8% in the first half of 2025, its worst such performance since 1973, and the decline was broad — 14.4% against the Swiss franc, 13.8% against the euro, 9.7% against sterling. A currency falling against every major counterpart at once is being repriced on its own terms.

The policy backdrop that supported dollar strength has inverted. The Bank of Japan raised rates to 0.75%, the highest since 1995, while the Federal Reserve cut toward 3.00% to 3.25%. A differential narrowing from both ends compresses faster than one moving from either alone, and it is the mechanism that forces carry positions to unwind.

The instructive part is how quickly a regime described as entrenched reversed. Wide rate gaps had been treated as a durable structural feature, and the argument that the dollar must fall and the yen must rise was widely dismissed shortly before both began to happen.

This article describes past market movements and the mechanisms behind them. It is not investment or financial advice, contains no forecasts or trading recommendations, and quoted levels reflect specific historical periods rather than current market conditions.

Data Source and Attribution

Morgan StanleyBloombergEFG International (BOJ)

Dollar index performance for the first half of 2025, the 1973 historical comparison and currency pair breakdowns come from published market data and contemporaneous reporting by Bloomberg and Morgan Stanley Research. Bank of Japan policy rate decisions and levels come from the central bank's December announcement and associated analysis. Federal Reserve policy direction reflects published expectations at the time of writing. Exchange rates and index levels change continuously and figures describe the specific historical periods stated.

FactsFigs reviews, cleans, and cross-checks every source dataset before shaping it into a data story. Each visualization is created and designed in FactsFigs Design Studio — an internal tool developed and owned by FactsFigs — and is the original work of a FactsFigs author, not an AI-generated copy of any existing graphic. Individual assets within a visual may or may not be produced with AI tools, but the design of the visual itself is solely FactsFigs' own.

This content is for information only and is not investment or financial advice. It contains no forecasts or trading recommendations. Currency markets are volatile and past movements do not indicate future performance.

2026-07-20