The Financial Times noted that the dollar’s first half was the worst since the first six months of 1973. At that time, the greenback’s value, measured against the six largest currencies, had fallen by 15%. By 2025, the decline over the first six months is more than 10%.
The two periods are very different.
The event of the first half of 1973 marked the end of the Bretton Woods exchange rate system. The formal framework that had held the International Monetary System (IMS) together was no longer viable and had become too restrictive. Its abrupt relaxation led to large-scale adjustments, particularly in the greenback.
Today, the story is not the same, since the prevailing framework was that of a flexible market. It is the recent rupture that raises questions. To take a particular dimension, the parity between the euro and the dollar followed the short-term interest rate differentials (two-year rates per year in one year) with remarkable regularity. Since the arrival of Donald Trump, the two curves have diverged. The parity is 1.17, while the interest rate differential would rather suggest a parity around 1.07. It is the dollar that has a problem.
The decline in the greenback reflects the confusion in economic policy implemented across the Atlantic.
Uncertainty is creating a form of hesitation among investors, who are no longer mechanically following interest rate arbitrage. The unpredictability of the White House’s decisions and the lack of long-term clarity in economic policy are putting off investors.
The question now is what happens next.
Will the US government allow the dollar to depreciate, as Stephen Miran wishes? Miran believes the dollar is a public good, and its strength has enabled the development of the rest of the world and of financial markets, to the detriment of the United States. While this theory is questionable, its implementation would pose a real question about the stability of the IMS.
Another possibility is the emergence of other currencies. Christine Lagarde talks about a global euro and the conditions that must be met to achieve it.
Pan Gongsheng, the head of China’s central bank, no longer wants the dollar as its benchmark currency. He advocates a multipolar IMS with strong competition between regional benchmark currencies. The yuan would not replace the dollar. He reportedly favors a greater role for Special Drawing Rights issued by the IMF to act as lender of last resort.
The story doesn’t end there. Stablecoins that look like national currencies but aren’t will add to the monetary confusion. Central bank-backed e-currencies are also creating confusion.
The risk is entering a period of monetary transition that could lead to instability. From this perspective, the United States would bear heavy responsibility for any potential chaos.