📍USD experienced the worst year in nearly a decade

If we only look at policies, 2025 should have been a favorable year for the US dollar. Tariffs were expected to bring capital flows back to the US, and the story of U.S. exceptionalism became the biggest narrative. However, DXY ended 2025 down -9%. In the first half of 2025: USD fell more than -12%, with a 6-month drop the strongest since the floating exchange rate system was introduced in the 1970s(.
-> On the G10 chart, the USD is the red line below the bottom; all other major currencies outperformed strongly — global capital is broadly leaving the USD. The global market is shunning the greenback.

🔶 Tariffs do not support the USD, leading to a surge in US imports
- US import levels in early 2025 hit record highs: imported goods increased by 5.4%, with a trade deficit reaching $140.5B )the worst in history(.
- From February to April 2025, US companies continuously front-run tariffs, importing large volumes before tariffs were implemented, with total imports reaching $403B—)also the highest in history$420B .
-> Although market expectations of a strong USD due to onshoring were shattered, it aligned with Trump’s strategy to keep the USD weak. However, the trade balance before tariffs continued to worsen.

🔶 Main risks of US policy increase:
- Extremely uncertain tariff policies, with Trump repeatedly changing decisions on tariffs, and the Supreme Court reviewing the legality of Trump’s use of IEEPA to impose tariffs.
- Escalating tensions between the White House and the Fed, with risks that the Fed may no longer be neutral, or even more dangerous, the Fed may slow down rate cuts.
-> The biggest risk is not policy stability but policy uncertainty; all analysis becomes meaningless when Trump’s decisions change weekly.

🔶 International stock markets outperform US stocks with the largest margin since 1993
- MSCI Europe: +36.3%
- MSCI Emerging Markets: +34.4%
- S&P 500: +17.9%
-> The gap between MSCI World ex-US and S&P 500 is about 15 percentage points, the largest since 1993. The weakening USD further reinforces the trend of holding assets outside the US, as the rest of the world offers better yields for the same level of risk.

🔶 All three pillars supporting the USD are weakening
- "Not enough good growth." While Europe/Japan/Korea/EM benefit from AI cycles, commodities, re-shoring...
- Nominal US interest rates remain high, but when adjusted for real rates after inflation and fiscal risk, this advantage no longer exists. The Fed is even expected to cut rates further.
- Institutions: Concerns over Fed independence + large fiscal deficits + rising public debt faster than GDP.
-> All are weakening, and Trump even has no intention of keeping the USD strong. Confidence declines -> risk premium increases -> the USD is being sold off globally.

Will the USD recover in 2026? The market likely leans toward the scenario that the USD will continue to be sold as the trade war remains difficult to resolve, the Fed Chair will change mid-year, and the US economy is expected to be unremarkable in the last six months.