The King or the Pauper? – The story of the US Dollar

The King or the Pauper? – The story of the US Dollar

The Dollar Index was down by as much as 11 percent at one stage this year as confidence in the Dollar took a toll for multiple reasons, and questions are now being asked if the Dollar’s reign going to continue or is the King merely a Pauper in-disguise? Supplied

Synopsis: Concerns around the Fed’s independence or the lack of it will have an impact on the performance of the Dollar.

The performance of the US Dollar (Dollar) in the foreign exchange market over the past 12 months can be similar to the two main characters in Mark Twain’s novel, The Prince & the Pauper.

In Twain’s classic, we have a story about two boys, a prince and a pauper, who switched places and experienced life in each other’s shoes.

Over the past three years, I have penned a number of articles on the Dollar and its importance and relevance in the currency market and international trade.

Since 2022, the Dollar has been behaving like a “King” amongst other currencies, supported by the elevated state of interest rates by the US Federal Reserve (Fed).

Fast-forward three years into the first six months of 2025; we see the Dollar having its worst year in decades.

The Dollar Index (DXY) (an index that measures the value of the Dollar against a basket of six foreign currencies, namely Euro, Swiss franc, Japanese yen, Canadian dollar, British pound, and Swedish krona) was down by as much as 11 percent at one stage this year as confidence in the Dollar took a toll for multiple reasons; and questions are now being asked is the Dollar’s reign going to continue or is the “King” merely a “Pauper” in-disguise?

Pauper in-disguise – Is more Pain coming for the Dollar?
The current US administration appears to be sending mixed signals with strong messages and pressure to cut interest rates aggressively, while imposing tariffs and hoping there is no impact on inflation.

Public rebuke against the Fed Chairman for being “too slow” in cutting interest rates is not helping the confidence in the Dollar. Concerns around the Fed’s independence or the lack of it will have an impact on the performance of the Dollar. Another key factor causing the drop in the Dollar is the anticipated decreasing interest rate trajectory in the next 12-24 months. The Fed’s most recent Dot Plot in June 2025 is anticipating at least two interest rate reductions of 0.25 percent each for 2025.

King in the making – Is there more Gain anticipated for the Dollar?
Whether central banks would admit it or not, the “elephant in the room”; being “inflation” never left. “The elephant” probably got smaller (momentarily) but its presence was always there, and with the current ongoing geo-political tensions and the threats of tariffs and sanctions, the “Inflation Beast / Elephant” is likely to cause more disruption.

The reciprocal tariffs by the US, post August 1, 2025 (assuming there is no further extension), will certainly have an impact on inflation in the US.

The current Federal Reserve Chairman had put it nicely in the June 2025 Federal Reserve Meeting that “someone has to pay for the tariff”, and is more often the consumer, and this will be reflected in the increased price of goods. With the threat of tariffs going as high as 100 percent (in the case of Russia), it will surely cause prices of goods/inflation to increase. As long as inflation remains elevated, interest rates will continue to stay elevated, resulting in the Dollar maintaining its stronger status and possibly “King” status against other currencies.

Notwithstanding the anticipated reduction in interest rates in the Fed’s Dot Plot, there is still a wide gap between interest rates in the US vs other economies.

Many investors and traders have re-started piling and taking more Dollar and high-yielding foreign currency positions in the past few months. In one of the largest and most populous economies, the People’s Bank of China (PBOC) in the first half of 2025 experienced a net increase of US$165.5 billion in foreign currency deposits (a substantial amount being Dollar), its biggest jump going back all the way to 2005. China’s total foreign currency deposits as at 30 June 2025 stood at US$1.02 trillion, the highest level since March 2022 (source: PBOC & Bloomberg).

As long as the interest rate gap remains wide between Dollar deposit rates vs other currencies, King Dollar will likely continue its reign.

How long will King Dollar reign – No Pain, No Gain?
The jury is out on the above question, but consider these facts and points. As of June 30, 2025, 50 percent of international payments, around 60 percent of foreign exchange reserves, around 70 percent of international debt and around 90 percent of foreign exchange transactions are all in Dollar (source: Wells Fargo Investment Institute).

The Dollar continues to dominate in many perspectives globally and no other currencies have been able to take-over the Dollar’s important status. Even the BRICS coalition’s proposal to have a common currency or to reduce the reliance of the Dollar has received strong rebuke from the US with threats of higher tariffs being levied for any BRICS members.

(Raymond Sia is the CEO & Executive Director of Canadia Bank since 2018. Besides banking, his hobby and passion include writing and speaking on banking and finance and leadership-related matters. Since April 2024, he has been contributing on a pro bono basis to Khmer Times in his monthly column ‘Right Angle’.)