What is next after significant dollar depreciation?
Movements in major currency pairs offer a uniquely fast and comprehensive signal of how investors are repositioning in response to both cyclical and structural global trends. In this context, recent USD weakness has taken many market participants by surprise, contradicting the previous consensus of a 'strong USD' associated with a long-standing US economic exceptionalism and Trump 2.0-related policy tailwinds. In fact, after peaking in early January 2025 on the back of a rally driven by expectations for a market friendly new US administration under Trump, the USD index (DXY) collapsed by 12%.
Importantly, the sharp DXY depreciation amounted to the worst start of the year for the US currency since 1973, when then President Richard Nixon engineered the USD de-pegging from gold and a significant currency devaluation. The recent DXY depreciation was also broad based, including all major currencies within the DXY basket, i.e., the Euro (EUR), the Japanese Yen (JPY), the Pound Sterling (GBP), the Canadian Dollar (CAD), the Swedish Krona (SEK), and the Swiss Franc (CHF).
This major movement was driven by a significant spike in economic policy uncertainty coming from the US. This has been caused by convoluted fiscal and trade policy making, which damped investor sentiment and led to a significant slowdown of US growth expectations, as well as longer-term questions about governance, rule of law and the future of the US role as a safe haven for foreign capital.
After such a significant move, however, it is natural to consider what is next for the USD. Has the depreciation gone too far? What to expect for the medium- and long-term?
In our view, while the sharp move and extended positioning of traders may grant a pullback of the USD over the short-term, conditions are likely set for further USD depreciation over the medium- and long-term. Three main arguments sustain our position.
First, the big gap in growth between the US and other major advanced economies are set to narrow significantly over the coming years, effectively moderating the so-called US exceptionalism. Strong net migration and a looser US fiscal stance have been strong forces behind the US outperformance. However, new migration policies and limited fiscal space all point to a further US slowdown. In contrast, leading economies from the Euro area, such as Germany, are expected to perform a much more accommodative fiscal policy, increasing investments in defence and infrastructure. As a result, the US-Euro area GDP growth differential, which favoured the US by an annual average of 220 basis points (bps) over the last few years, is set to narrow to 70 bps over 2025-2027. This should strengthen the EUR against the USD, driving the DXY further down – the EUR counts for 57.6% of the DXY basket.
Second, an assessment of the USD suggests that the currency is overvalued and in need for an adjustment. A common way to look at currency 'valuations' is to analyse trade-weighted, inflation-adjusted exchange rates, i.e., the real effective exchange rates (REER), and compare it to their own long-term averages or historical norms. This REER metric is more robust than traditional FX rates as it captures changes in trade patterns between countries as well as economic imbalances in the form of inflation and inflation differentials. The REER picture for May 2025 suggests that the USD is indeed the most overvalued currency in the advanced world, by more than 17% of its notional 'fair value.' Hence, it would be expected for the currency to adjust towards fair prices over the medium-term.
Third, cross-border financial asset positions suggest that a structural re-balancing of global capital allocations may trigger a significant wave of capital outflows from the US. The US is currently a large net debtor to the rest of the world, with a net international investment position (NIIP) that is negative by USD 24.6 trillion. The picture has also been deteriorating sharply, as the NIIP of the US progressed from a marginal negative figure of around 9% of GDP at the start of the GFC to 88% of GDP by the end of last year. This suggests that the US is by far the country where most global economic imbalances tend to concentrate. This level of cross-exposure seems to be starting to become uncomfortable to both creditors and debtors, requiring significant adjustments.
All in all, this year has brought so far the sharpest depreciation of the USD of the last half a century. However, over the medium- to long-term, there is still scope for further USD depreciation, due to the narrowing of the US economic outperformance, the overvaluation of the USD, and the massive accumulation of non-resident assets in the US. A more orderly process of currency adjustments would probably require significant global macro cooperation.
— By QNB Economics
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Al Jazeera
a day ago
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In 2021, that surplus nearly vanished, and in 2022 and 2023, the US notched up an ice cream trade deficit of $92m and $33m, respectively. At first glance, importing frozen foods doesn't seem practical. 'Shipping refrigerated and frozen products overseas is expensive,' dairy economist Betty Berningat of HighGround Dairy said. 'Mexico is the top destination for US dairy exports.' But many US and European companies have tapped into global markets. 'Consumers may also want a specific treat that is styled after or known to be from another country,' Herrick said. Italy, the birthplace of gelato, is now the United States' largest single source of imported ice cream. Italian ice cream imports more than quintupled from about $12m to almost $65m between 2020 and 2021 alone, before decreasing somewhat in 2023, the last year for which data is available. Some of this stems from increased consumer demand for specialty pints. 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The White House has churned out plenty of ice cream devotees. George Washington stocked the capital with ice cream-making equipment. Thomas Jefferson is credited as being the first American to record an ice cream recipe. Ronald Reagan declared July National Ice Cream Month in 1984. Barack Obama even slung scoops back in the day. Biden, who was often sighted with a cone in hand, proclaimed while visiting Jeni's Splendid Ice Cream headquarters in 2016: 'My name is Joe Biden, and I love ice cream.' But consumption of regular dairy ice cream – a category that does not include frozen yoghurt, sherbet or nonfat and low-fat ice creams – has been trending down for years. In 1975, Americans ate an average of 18.2 pounds each of ice cream per year. That figure fell to 11.7 pounds by 2023. Our ruling The office of the US Trade Representative purported a summertime scoop: 'America had a trade surplus in ice cream in 2020 under President Trump's leadership, but that surplus turned into a trade deficit of $40.6 million under President Biden's watch.' It's accurate that the US ice cream trade balance had a surplus for a quarter of a century before turning negative while Biden was president. But the US Trade Representative's statement makes the US ice cream deficit appear out of cone-trol. There are three scoops of context on this trade sundae: The change was driven mostly by a jump in imports. Exports have remained largely unchanged since 2020. US ice cream imports and exports are a negligible amount compared to domestic production. There's also disagreement over which products should or shouldn't be included in the data set, which can skew trend interpretations. Excluding edible ice products and factoring in ice cream mixes leaves the US with a surplus. The statement is accurate but needs a sprinkling of clarification and additional details, so we rate it Mostly True. Louis Jacobson contributed to this report.
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