The dollar is having a crisis of confidence, and the Federal Reserve can't seem to stop talking long enough to fix it. Persistent squabbling among FOMC members over rate direction has turned monetary policy into a guessing game. Markets hate guessing games. When Fed officials can't agree on inflation targets or labor market trade-offs, the public gets confusing guidance. And when guidance is confusing, confidence evaporates.
The numbers tell an ugly story. The dollar depreciated 10.7% in the first half of 2025—the sharpest semiannual drop in over fifty years. The trade-weighted index fell 5.6% in Q2 alone. Against the euro, down 8.2%. Against the yen, down 4%. Even emerging market currencies gained ground while the Fed bickered over balance sheet reduction versus prolonged asset holdings.
Then came the speculation about the Fed Chair's job security. That brilliant episode triggered a 1.2% dollar decline in a single trading hour in July. Nothing says “stable reserve currency” like headline-driven panic selling.
The infighting poisoned growth expectations too. U.S. GDP consensus fell from 2.3% to 1.4% between March and April. Lower growth means earlier rate cuts, which means more dollar selling. Investors responded by jacking up hedge ratios on U.S. assets—a polite way of saying they don't trust the currency anymore. Market contacts attributed the dollar's weakness partly to downward revisions to the U.S. growth outlook following the announcement of reciprocal tariffs on trading partners. The connection between interest rate decisions and currency values became painfully clear as traders priced in mounting evidence of policy paralysis.
Capital flows tell the same story. Monthly net foreign flows into U.S. equities turned negative in early 2025 after years of inflows. European-focused ETFs pulled in a record $42 billion through July as investors rotated away from dollar exposure. Non-U.S. domiciled ETF inflows into American shares dropped from $10.2 billion to $5.7 billion compared to the same period in 2024. The shift reflected growing concerns about monetary policy credibility as divergent Fed messaging undermined institutional confidence in dollar-denominated holdings.
Even the dollar's safe-haven status took a hit. Traditional flight-to-safety rallies barely materialized during volatility spikes. Market participants started questioning whether the Fed could actually manage a crisis when it can't manage its own messaging. Multiple policy voices created what analysts call “headline sensitivity”—outsized FX moves on even minor Fed news.
When soft July jobs data showed just 73,000 new positions, the sensitivity went into overdrive. Policy disarray has consequences.
