According to research firm Yardeni Research, the US dollar will continue to dominate the global currency market in early 2025.
The U.S. dollar continues to dominate the global currency landscape as 2025 began, defying widespread predictions of its decline despite mounting concerns about American debt zooming to $38 trillion and international efforts to reduce dollar dependence, according to Yardeni Research.
While the dollar fell 12% against the euro this year and declined less than 1% versus the yen, these losses appear to represent a correction rather than the beginning of a sustained downtrend, the research indicates.
The dollar’s resilience becomes clear when examining the fundamental weaknesses of its competitors in the International Monetary Fund’s special drawing rights basket of reserve currencies.
The euro, which accounts for only around 20% of global reserves, faces structural limitations that prevent it from challenging dollar supremacy.
The 20 countries using the euro have refused to enter into a strong fiscal union to match their monetary union, leaving Europe without a single debt instrument to rival U.S. Treasuries. This fragmentation underscores the unparalleled depth and liquidity that U.S. markets offer, the brokerage added.
Japan’s yen presents its own challenges as a reserve currency alternative. Despite expectations that the Bank of Japan would tighten monetary policy for a second time this year on December 19, the currency faces headwinds from Japan skirting recession and Prime Minister Sanae Takaichi’s economic strategy relying on a weak exchange rate. These factors have kept yen bulls on the sidelines.
The British pound has struggled in the aftermath of Brexit, with the globe’s sixth-biggest economy unable to stabilize its finances.
Three years after then-Prime Minister Liz Truss’s policies nearly broke the bond market, current leader Keir Starmer is fending off speculation that Britain may need an International Monetary Fund bailout.
The brokerage said, with bond vigilantes monitoring every move by Chancellor of the Exchequer Rachel Reeves, the pound hardly projects the stability expected of a safe-haven currency.
China’s yuan, despite President Xi Jinping’s goal of elevating it to major reserve currency status, still isn’t fully convertible.
The People’s Bank of China lacks independence, and the nation’s economic fundamentals remain troubled by a seemingly never-ending property crisis generating deflation, according to the analysts.
The dollar’s dominance reflects what Yardeni Research describes as a beauty contest where the winner isn’t the prettiest contestant but the one with the fewest flaws.
The dollar still commands about 60% of central bank reserves, remains the primary tool in import and export invoicing, and dominates global corporate borrowing.
The brokerage acknowledges risks to the dollar’s position. U.S. inflation is running around 3.0%, higher than ideal. The country no longer holds AAA credit ratings.
President Donald Trump’s tariff plans and potential trade war pose uncertainties, particularly given that China’s trade surplus in goods surpassed $1 trillion for the first time in just 11 months this year.
Additional concerns include Trump’s disapproval of Fed Chair Jerome Powell and occasional threats to devalue the dollar.
Nevertheless, carry trades borrowing in low-yield yen or Swiss francs are ending 2025 favoring bets on the dollar’s strength. De-dollarization efforts by China, Saudi Arabia, and "Global South" nations have achieved limited success.
Disentangling the dollar would be a lengthier, costlier, and more disruptive process than even most adversaries would want to attempt, Yardeni adds.