Since June 23,the US Dollar Index (DXY) has declined continuously, dropping from 99.08 to 97.14 points by early July.
What is the Dollar Index?
Simply put, it measures the USD's value against a weighted basket of major currencies.
Three key factors indicate the DXY is in a downward cycle:
Erosion of USD's reserve currency status
Elevated US "real interest rates" poised to decline
Historically high DXY valuation
Factor 1: The US economy faces structural concerns threatening the dollar's reserve status.
In November 2024, US national debt surpassed $36 trillion, with "debt sustainability" becoming a market-wide concern. Since 2022, central banks globally have accelerated gold purchases to hedge USD exposure. World Gold Council data shows non-US central banks' net gold buying exceeded 1,000 metric tons annually during 2022-2024, sharply up from under 500 tons in 2021. This gold accumulation as a reserve alternative evidences the dollar's weakening dominance.
Factor 2: US real interest rates remain high but are projected to fall.
Since March 2025, US CPI has stabilized around 2.4%, nearing the Fed's target. As shown below, the US has entered a rate-cut cycle with three benchmark rate reductions in September, November, and December 2024. Domestically, President Trump has criticized Fed Chair Powell for slow rate cuts and is considering nominating a new chair to accelerate monetary easing.
Factor 3: The DXY trades at historical highs.
Having bottomed in 2008, the index has oscillated at elevated levels since 2022 . China International Capital Corporation (CICC) analysis indicates that after inflation adjustment, the "real effective exchange rate" shows current USD strength exceeds the 2000-cycle peak. High DXY levels typically precede USD depreciation against other currencies, further undermining its reserve appeal and perpetuating a downward spiral.
DXY Implications & Declines Significance
The index reflects USD's global strength. Its decline signals reduced capital inflows to the US. Even with Fed rate cuts, domestic liquidity conditions may remain tight.
The downward cycle asymmetrically impacts economies:
Accelerated capital outflows from the US
Improved liquidity conditions in non-US regions (due to lower USD-denominated borrowing costs)
This environment stimulates financial markets and real economic growth globally.
Fidelity International's Asia economist Liu Peiqian notes repatriated USD assets initially flow to home markets: European capital to the Eurozone, Asian capital to regional assets, before dispersing elsewhere. Equities, bonds, and other assets stand to benefit, creating enhanced opportunities in non-US markets.
UK's Resurgent Appeal
Recent immigration policy adjustments have refocused international attention on Britain. GBP holders may find reasons to cheer—USD weakness naturally boosts sterling, compounded by the Bank of England's (BOE) hawkish stance. Amid global rate cuts, the BOE maintains its 4.25% benchmark rate. Governor Andrew Bailey emphasized that despite labor market softening, persistent inflation warrants measured easing. Simply put, interest rate differentials anchor capital retention and currency stability.
London's financial infrastructure provides critical support:
World's largest FX trading hub ($3.6 trillion daily volume)
Sterling's resilience draws strength from both BOE policy and the City's global liquidity centrality.
Market sentiment has visibly shifted. Clients formerly invested in US assets now seek strategies to divest USD exposure for GBP-denominated alternatives. Asset allocation spans virtual and physical domains, with particular interest in UK fixed-asset projects.
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