The United States dollar on the back foot

The United States dollar has been under pressure throughout 2025 on the back of elevated uncertainty and increasing concerns about the financial health of the Federal government. 

This has come into sharp focus with the shutdown of the United States government on 1 October due to a disagreement between Republicans and Democrats on certain expenditure items. 

The dollar’s weakness throughout 2025 has come as a surprise to many and appears to signal the end of the currency’s strengthening for the past 15 years. 

Typically, during periods of elevated uncertainty, the dollar strengthens as it is viewed as a safe-haven asset due to America’s position as the world’s largest economy and most important financial centre.

However, in 2025, investors have looked elsewhere for safety, such as gold and other precious metals, as well as assets outside of the United States. 

This is largely due to the increased uncertainty created by US President Donald Trump’s significant changes to American trade policy and increased doubt about the US government’s financial health. 

The United States continues to run record deficits out of wartime, with its debt burden increasing to over $36 trillion and its interest payments exceeding spending on America’s renowned military. 

As a result, the US dollar has weakened by 9.7% since the beginning of 2025, with this weakness often being mistaken for rand strength, Investec chief economist Annabel Bishop said.  

The rand has only strengthened by 8.9% against the dollar in 2025, indicating that the only reason why the local currency has appreciated against the greenback is because of dollar weakness. 

While the rand has strengthened against the dollar, this has been entirely due to its weakness on the translation effect, as the US dollar has weakened this year by more than the rand has strengthened against it, Bishop said. 

The rand has received additional support from renewed foreign buying of South African government bonds in recent weeks, as well as a robust improvement in its terms of trade. 

Stanlib chief economist Kevin Lings explained that the ongoing government shutdown in the United States is likely to translate into further questions surrounding American fiscal health and, thus, a weaker dollar. 

However, in the short-term, the dollar might see a jump in value as investors flock to dollar-based assets amid increased uncertainty.

Lings said America is likely to suffer a decline in GDP growth of 0.1% for each week of the shutdown and a prolonged shutdown may result in a delay in releasing key economic data, further increasing uncertainty. 

“So, it is obviously not good from a GDP perspective and obviously not good from a confidence perspective. The sooner it gets sorted out, the better it is for everybody,” Lings said. 

The graph below shows the rand’s value versus three major currencies, with a noticeable uptick against the dollar in 2025 as the greenback weakened while the rand held steady against the euro and pound. 

End of an era

The dollar’s weakness in 2025 during a period of elevated uncertainty has led some to think that it may mark the end of the greenback’s dominance. 

Since the Great Financial Crisis (GFC) in 2010, America’s financial markets have soaked up global liquidity thanks to the country’s strong economic performance and the exceptional returns its assets have provided. 

However, in 2025, the script appears to have flipped, with investors looking elsewhere for safety and returns as fears of a bubble in American equities rise and increased questions about the management of US government finances begin to weigh. 

This does not mean the US dollar will lose its status as the world’s reserve currency, with it remaining dominant in that sphere without much change over time, chief investment strategist at Symmetry, Izak Odendaal, said. 

The dollar also remains the primary currency used for international transactions and financial flows, making it indispensable for global trade. 

This strength over the past 15 years largely reflects stronger economic growth in the United States, and consequently higher interest rates, as this attracts capital, Odendaal said. 

Moreover, the stunning outperformance of its large technology shares made the United States equity market a must-own for investors worldwide. 

As the dollar gained, it boosted the value of US investments for non-US investors and similarly made international investments unattractive for Americans.

Add in geopolitical risk, such as Russia’s war in Ukraine, and at the start of the year, the real trade-weighted dollar index was near its highest level since 1970. 

In 50 years, it was only stronger 5% of the time. From this elevated level, there is naturally little upside and plenty of room to decline, Odendaal said.

He explained that if it were any other currency, the dollar would have fallen much further, given its overvalued nature, policy uncertainty in the United States, and the deteriorating financial health of the government. 

Since Trump has taken office, there has been a lot that makes investors nervous, Odendaal said, particularly his trade policies. 

This can be seen in the decoupling of the dollar from interest rate differentials. Normally, elevated US interest rates would have resulted in a stronger dollar. Instead, it has fallen 11% against the euro this year.

Apart from the tariff uncertainty, investors’ biggest concerns include the inexorable rise in US government debt levels and the independence of the Federal Reserve.

Even when Trump departs the scene, deep political divisions in the United States mean these issues will not go away. Therefore, Odendaal said, the world’s overexposure to US assets no longer seems a sure bet. 

This does not imply a mass exit from US positions, but more likely reduced inflows. It doesn’t mean people will stop using the dollar or accepting it as payment. 

This is not the death of the dollar by any stretch of the imagination, but more likely the end of a 15-year run of appreciation. Nothing happens in straight lines, however, and if this is the start of a down cycle, there will still be dollar rallies.