Will the US dollar continue its decline against major currencies in 2025?

Written by

Fabien Yip

Market Analyst

The US dollar has experienced a pronounced depreciation recently. The dollar index (DXY) is poised to record its weakest monthly performance since November 2022, declining 8.4% year-to-date against a basket of major currencies. Despite this significant retreat, further downside potential remains as current levels still substantially exceed those observed in 2021.

Key Currency Valuation Drivers

There are many fundamental factors that can influence currency valuations. Here are a few common ones:

• Monetary policy dynamics: Elevated interest rates typically attract international capital flows, bolstering currency strength
• Economic fundamentals: Robust economic indicators -- including lower unemployment rate, accelerated gross domestic product (GDP) expansion, and strengthened consumer sentiment -- generally enhance currency demand
• Inflationary environment: Currencies from economies with lower inflation rates typically appreciate as their purchasing power remains comparatively stronger
• Geopolitical and market stability: Stable political frameworks and financial markets reinforce currency credibility among international investors
• Trade position: Nations maintaining trade surpluses (where exports exceed imports) experience heightened demand for their currencies as foreign buyers must acquire the local currency to purchase exported goods, thereby supporting currency valuation

The current US dollar weakness can be primarily attributed to deteriorating investor confidence in the US economic framework, with equity markets exhibiting heightened volatility amid tariff speculation and questions surrounding Federal Reserve autonomy. The atypical surge in long-term US treasury yields corroborates this assessment. Notably, this represents a departure from traditional market dynamics - where rising treasury yields typically strengthen the US dollar through increased foreign capital attraction - indicating a fundamental shift in investor sentiment regarding US assets.

Compounding these pressures are mounting concerns regarding economic momentum. Notably, the International Monetary Fund (IMF) has recently revised its US recession probability forecast upward to 40%.

Figure 1: IG US dollar basket price chart

Currency Pairs to Watch

EUR/USD

The euro has demonstrated exceptional performance, appreciating 5.5% against the US dollar in the previous month. As confidence in US assets wanes, the euro -- the second largest global reserve currency -- has attracted significant capital flows. European equities have similarly gained momentum as global investors pursue portfolio diversification strategies. Proposed fiscal expansions in infrastructure and defence have enhanced Euro area growth projections.

However, several counterbalancing factors may constrain the euro's upward trajectory. The European Central Bank (ECB) implemented a 25-basis-point interest rate reduction earlier this month, citing persistent disinflationary trends. Additionally, the ECB has expressed concern regarding the potential adverse impact of US tariff policies on European economic growth. Market consensus indicates expectations for an additional two to three rate reductions before year-end.

Technical analysis reveals EUR/USD within a robust ascending channel with medium-term potential to target the 1.19 level, assuming the current rally matches the magnitude observed between September 2022 and July 2023. However, considering the steep year-to-date appreciation, a consolidation phase may precede further advances. Support levels are anticipated at approximately 1.12, with a critical secondary support at the 200-day simple moving average (SMA) of 1.07.

The forthcoming Euro Area Q1 GDP data and inflation flash estimates will provide critical insights into the currency pair's directional bias.

Figure 2: EUR/USD daily price chart

USD/JPY

Following its recovery from seven-month lows, USD/JPY has established a consolidation range as market participants await key economic indicators, including the US personal consumption expenditures (PCE) price index, US Q1 GDP figures, and the Bank of Japan's (BoJ) monetary policy decision.

Apprehension regarding US economic resilience continues to intensify, evidenced by deteriorating employment statistics and consumer confidence metrics. Concurrently, Tokyo core inflation has accelerated to 3.4%, reaching its highest level in two years. Our fundamental assessment indicates sustained yen appreciation potential, albeit with intermittent retracements.

From a technical perspective, the currency pair remains confined within a descending channel below the 200-day simple moving average (SMA). While recent price action suggests temporary USD strength, upside appears constrained by the descending channel's upper boundary at 143.5-143.8, beyond which the prevailing trend is expected to reassert dominance. The recent 139.9 low constitutes immediate support, while significant resistance manifests at approximately 148.1.

Figure 3: USD/JPY daily price chart

AUD/USD

The Australian dollar encountered considerable downward pressure in early April amid tariff-induced market volatility. Given China's position as Australia's predominant trading partner, Chinese economic conditions significantly influence AUD trajectories. Substantive progress in US-China trade negotiations could catalyse further AUD/USD appreciation. Additionally, recent consumer price index (CPI) data indicates a 0.9% increase in the first quarter of 2025, up from the previous quarter's 0.2%. On a 12-month basis, CPI rose 2.4%, slightly higher than market expectations.

Market pricing currently reflects a 97% probability of a Reserve Bank of Australia (RBA) rate reduction at its 20 May meeting. Traders anticipate four to five 25-basis-point (bp) cuts by year-end, potentially bringing cash rates below 3%. Should the RBA adopt a more measured approach to monetary easing, this would provide additional support for the Australian dollar.

Technical analysis indicates AUD/USD at a pivotal juncture as it attempts to breach its horizontal consolidation range and establish position above the 200-day moving average (SMA). A decisive break above this moving average may signal completion of the corrective phase, with potential for extension toward the 0.67 level.

Figure 4: AUD/USD daily price chart