In 2025, the most important event was Trump's "Liberation Day" in April where he announced the reciprocal tariff rates for pretty much all the countries in the world. The tariffs were set so high that they surprised everyone and led to risk aversion in the markets.
Given the strong selloff in the US dollar in the first half of 2025, the de-dollarisation narrative gained steam and everyone started to blame de-dollarisation everytime the greenback weakened against the major currencies.
The problem is that even if there's a slow trend of diversification from the US dollar, it can't be replaced any time soon. The main driver of the dollar remains the market's outlook for the Federal Reserve monetary policy. Everything else is just noise.
In fact, in 2024 the long dollar positioning reached an extreme following Trump's election. The market turned very hawkish on the Federal Reserve and those expectations kept the USD strong. In 2025 though, Trump started to rattle markets with his tariffs agenda that culminated with the Liberation Day in April.
The selloff in the US dollar was just caused by the unwinding of extreme long dollar positions and then on the expectations of Fed rate cuts. That's it.
In fact, if we look at the monthly DXY chart below, we can see that the selloff in April marked the bottom in the bearish trend and from there we just kept on ranging. Right now, DXY is trading around the April 2025 levels.
This year, the market expects the Fed to cut at least two times. This is already priced in, so it's not going to lead to meaningful appreciation or depreciation. The next major move is going to come either from an unwinding of bearish dollar positioning on a hawkish repricing or an increase in rate cut bets if the US labour market or inflation continue to surprise to the downside.
Therefore, watch the US data this year but keep also an eye on the US Supreme Court decisions on tariffs and Fed's Cook as they can have an impact on interest rate expectations. On the geopolitical front, the most important thing to keep an eye on is Taiwan because of its critical influence on global tech industry.
