US dollar has now lost over 10% of its value this year

The U.S. dollar fell about 11% in the first half of 2025, its steepest decline in more than five decades, effectively ending a 15-year bull run. Morgan Stanley Research projects the greenback could lose another 10% by the close of 2026.

Even after a rebound of 3.2% in July, ongoing tariff effects on growth and employment, along with policy uncertainty, are expected to maintain downward pressure. Foreign investors have been adding currency hedges to their U.S. holdings, a move that may further weaken the dollar.

The dollar index — which tracks the U.S. currency against a basket of major trading partners — posted its largest first-half drop since 1973, down 11% from January through June. That slump also capped a structural bull phase that began in 2010 and ended in 2024, during which the dollar gained roughly 40%.

Although July brought a modest bounce, Morgan Stanley sees the longer-term slide continuing. “We’re likely at the intermission rather than the finale,” said David Adams, head of G10 FX Strategy at the firm. He expects the second stage of dollar weakness to unfold over the next year, as U.S. interest rates and growth converge with global levels.

A weaker dollar carries broad economic consequences. Americans would face higher costs when traveling abroad, foreign appetite for U.S. assets could wane, and import prices could rise, fueling inflation. On the flip side, U.S. exporters may benefit from improved competitiveness.

Changing Growth Outlook

Following Donald Trump’s 2024 election, consensus expectations pointed to another period of U.S. outperformance — with strong growth, capital inflows, and a firm dollar. That view shifted in April, however, after tariff announcements and the policy uncertainty that followed. Rising concerns about slower growth, inflation pressures, and mounting public debt added to the drag on the currency. Between April and June, the dollar index shed nearly 7%.

In its May Midyear Economic Outlook, Morgan Stanley projected U.S. GDP growth slowing to 1.5% in 2025 and 1% in 2026, down from 2.8% in 2024. At the same time, the firm expects the Federal Reserve to ease policy, cutting rates from the current 5.25%–5.5% range to as low as 2.5% by the end of 2026.