The Dollar is the latest victim of the confidence crisis across asset classes globally. It slipped below the psychologically important 100 mark for the first time since July 2023, lowest in 21 months against a basket of currencies. In fact the dollar has been trending downwards since the Dollar Index hit a high of 110 in January. The Index is down a whopping 8% so far in 2025. Can the weak dollar be good news for India in current times? Well, market observers point out that the weakening is more an outcome of strategic Policy moves by the US and India is unlikely to see immediate gains.
Here is a look at why the Dollar Index slumped and what it means for world markets-
Dollar Index dives to 3-year lows
The sudden dip in the Dollar Index came after the US announced that “tariffs on China now total 145%, up from the previously indicated 125%.” Deutsche Bank analysts note in a report that while the difference is negligible in practical economic terms, the market’s reaction highlights increased sensitivity to the risks of a disorderly economic decoupling between the world’s two largest economies.
According to Devarsh Vakil, Head of Prime Research, HDFC Securities pointed out that, “the dollar index is weakest since April 07, 2022 and last quoted at 99.70, as escalating trade tensions between the US and China prompted investors to pull back from US assets. Yields on the 10-year US Treasury were last quoted at 4.43%, recovering after plunging to as low as 3.86% earlier this week. Recently, the inverse relationship between the dollar and bond yields has re-emerged, reflecting growing concerns over potential stagflation.”
Why is the Dollar Index falling?
Typically, the Dollar Index falling is a sign of investors losing confidence in the green back and option for other safe haven assets. Often the rising yield is also associated with investor fear and the current correlation of weak dollar and higher yields is indicative of the apprehension among investors.
Anindya Banerjee, head of Currency and Commodity, Kotak Securities said that “The US Dollar Index is grappling with a crisis of confidence. Policy uncertainty, particularly the erratic shifts in external and trade policies under the Trump administration, is accelerating the dual forces of de-dollarisation and de-globalisation. Markets are increasingly pricing in the likelihood of deeper interest rate cuts by the Federal Reserve to support a weakening US economy, adding to the pressure on the dollar.”
He added that “Over the next 12 – 24 months, we expect coordinated policy efforts aimed at weakening the dollar meaningfully from current levels as part of a broader strategic reset in US economic policy.”
HDFC Securities’ Vakil highlighted that,“A number of Federal Reserve officials delivered remarks this week, emphasizing the upside risks to inflation. They warned that heightened tariffs could contribute to sustained price pressures and signalled that the Fed sees no urgency in cutting interest rates in the near term. This has weighed on the greenback while supporting the Asian currencies.”
Dollar weakness part of “America First” Policy
Typically a weak dollar could have both positive and negative consequences. Many times, it is seen that Central Banks globally, like the US Fed may employ a certain kind of monetary policy to weaken the currency, dollar in this case, to offer some support to a struggling economy and create competitiveness in trade globally.
Banerjee added that the, “America First policy framework is emerging as a catalyst for de-dollarisation through de-globalisation, and potentially marks the end of an era of American hyper-consumerism. While a potential escalation in trade tensions may offer short-term support to the dollar against BRICS+ currencies, we believe that over the medium to long term, the US administration and the Federal Reserve may actively pursue a weaker dollar. The objective: to restore export competitiveness and rebalance trade.”
How will a weak dollar impact India?
Another key question that comes to mind is that can a weak dollar change the market direction and the course of FII flows in India over the near-term? Well, not so soon, said market expert Ajay Bagga.
According to him, “Usually US dollar weakness leads to EM flows . India gets benefited from that as well as FPI flows into Indian debt and equity pick up. However this time the US dollar weakness is due to immense policy caused uncertainty . In that situation , there is a risk off sentiment predominant . We are seeing safe haven buying with flows moving to gold , Swiss franc and Japanese Yen assets.”
Bagga sounded a note of caution for equity investors and explained that, “Given that the US economy is still showing strong data though the outlook is worsening due to the tariff tantrums , we would be cautious in assuming any inflows into EMs just on the Dollar weakness. Policy based corrections like these usually lead to sharp reversals as policy reaction functions are modified or reversed hastily. Hence it’s a safety first, conserve capital and we don’t expect India to benefit from this for now.”
What is the “Dollar Index”
The Dollar Index is a relative measure of the dollar against a basket of currencies. It comprises 6 component currencies including the euro, British pound, Japanese yen, Canadian dollar, Swedish krona and Swiss franc. The Euro was adopted later. Before it was formed, there were 10 currencies in the basket. However, the French Franc, Deutsche Mark from West Germany, Lira from Italy, Dutch guilder and the Belgian Franc were later replaced by the Euro. The Dollar Index was started in March, 1973. It had started with the value of 100 and rallied to all-time highs of 164.720 in February 1985 and plunged to a low of 70.698 on March 16, 2008. This is why the current fall below the 100 mark is seen as a major trend indicator.