Why the U.S. Dollar Could Benefit From a Global Recession

Key points

• The U.S. dollar has fallen about 10% from its 52-week highs, pressured by dovish Fed policy and political tensions that have pushed investors toward equities and other major currencies.
• A global recession is the wild card—safe-haven flows could quickly flip the narrative and drive renewed dollar strength, as seen in the mid-2010s and after the pandemic-induced recession.
• The dollar’s next chapter will hinge on how Fed policy stacks up against other global central banks, with trade dynamics, fiscal policy and global economic strength also playing important roles.

A decade ago, the U.S. dollar’s trajectory felt more predictable: whenever the Fed stood pat while the European Central Bank (ECB) and the Bank of Japan (BoJ) slashed rates, foreign exchange desks piled into dollar longs without hesitation. That relative‑yield advantage was the bedrock of the classic carry trade, a low‑risk way to tilt portfolios in your favor. But as we reach mid‑2025, that once‑reliable playbook has been turned on its head.

According to the DXY index—a broad measure of the dollar against a basket of major currencies—the greenback is down roughly 10% from its 52-week high. This weakness is particularly pronounced against the euro, with EUR/USD up over 12% year-to-date. The dollar's narrative has grown more complex in 2025—slowing inflation has tilted expectations toward a more dovish Fed, while political pressures and shifting global trade dynamics add fresh uncertainty to the currency's outlook.

Although U.S. inflation has eased toward the Fed’s 2% target—an outcome that would normally solidify the dollar’s yield advantage over other major currencies—the Fed’s early pivot to easing has flipped the script. Real yields on dollar-denominated assets have fallen, undercutting what would historically be a reliable tailwind for the greenback.

Layered on top is an unusual degree of political uncertainty surrounding the Fed. Public critiques and oversight threats from the administration have fueled questions about the Fed’s independence—raising concerns that policy decisions could be influenced by political priorities rather than economic fundamentals. As a result, currency traders are now weighing not just the state of the U.S. economy, but also the credibility and autonomy of the institution guiding monetary policy.

Meanwhile, a wave of risk-on sentiment has further undercut dollar demand. The late-July trade deal with Japan—featuring a 15% cap on auto and industrial tariffs in exchange for major Japanese investment—sparked flows into equities and non-dollar currencies. In Europe, optimism over potential tariff relief has added to the shift, while mounting fiscal concerns—ballooning deficits, Moody’s downgrade of U.S. sovereign debt to Aa1 (on May 16) and unpredictable trade policy—continue to erode the dollar’s traditional appeal.

In the next two sections, we’ll explore the forces most likely to shape the dollar in the months ahead—from recession risks that could reignite safe-haven demand to global rate shifts that could set the tone for its trajectory into 2026.

Why a global recession could strengthen the greenback

While expectations for Fed rate cuts have dominated recent forex debates, recession risk may prove the real wildcard for the dollar. Markets currently expect the Fed to cut rates by a quarter point in September 2025, but a sharper downturn could trigger a more aggressive easing cycle—and, paradoxically, boost demand for the dollar. Historically, recession fears have tended to strengthen the world’s premier “safe-haven” currency.

The technical definition of a recession—two consecutive quarters of negative GDP growth—hasn’t yet been met, and current projections put U.S. growth at roughly 2.5% in Q2, rebounding after the economy unexpectedly contracted in Q1 for the first time in nearly two years. Still, if growth falters in Q3 or Q4, the U.S. could tip into recession. And even without a domestic downturn, a recession in Europe, Japan or another major economy could strengthen the dollar, driven by relative U.S. resilience.

This isn’t just theory. In the mid-2010s, the idea of “U.S. exceptionalism” captured how steadier American growth and a cleaner fiscal position drew capital from struggling economies, pushing the dollar higher. At the time, investors saw the U.S. as a safe harbor—offering political stability, deep capital markets, and the world’s dominant reserve currency. That perception delivered a multi-year stretch of dollar strength, with yield advantage and economic resilience reinforcing one another even as other developed economies faced sluggish growth, austerity, and unconventional monetary policy.

More recently, the pandemic-induced global recession provided a fresh stress test—and once again, the safe-haven trade held. In early 2020, the dollar swung sharply in both directions as investors reacted to sudden lockdowns, collapsing growth forecasts and unprecedented policy responses. The more sustained rally began in spring 2021 and carried through late 2022, underscoring that investors weren’t buying dollars because America was immune to turmoil, but because in an uncertain economic environment, U.S. assets remain among the most liquid and trusted refuges.

That episode showed how quickly sentiment can turn in the dollar’s favor. A similar backdrop today—especially with greater clarity on U.S. trade policy—could quickly restore that advantage. In short, while many traders are still betting on a weaker dollar, a global slowdown could just as swiftly flip the script, reestablishing the greenback’s role as the ultimate safe haven.

How global monetary policy could influence the dollar’s trajectory in H2 2025

Recession risk aside, another key determinant for the dollar will be monetary policy—particularly how the U.S. Federal Reserve’s path stacks up against its global peers. If recession fears fade, the Fed’s rate decisions will likely reclaim center stage, shaping the greenback’s next move. And even a small deviation from the expected path could send the currency in sharply different directions.

The Fed made its first 25-basis-point cut at the end of last year, and another is widely expected in September. But the bigger question—and the one markets are already positioning for—is December, where expectations are split between another quarter-point trim and a deeper half-point move.

For investors, the difference matters. If inflation proves sticky—especially if higher import prices from newly imposed tariffs push consumer costs higher—the Fed could limit its December move to a quarter-point cut or even pause altogether. That would signal a “higher-for-longer” stance, keeping U.S. real yields elevated versus peers, attracting capital into dollar assets and lending the greenback renewed support.

A more dovish path—quarter-point cuts in both September and December—would likely add to downward pressure on the dollar, though not enough to trigger a major slide. Without matching moves from the European Central Bank or Bank of England, the yield gap would still favor the U.S., keeping EUR/USD and GBP/USD declines relatively modest.

The most dollar-bullish outcome would be if the ECB or BoE cut rates first—prompted by renewed growth concerns—and the Fed holds steady. That could push U.S. yields back to the top of the pack, and spark another leg higher for the dollar. In short, for investors with dollar exposure, the balance of 2025 may hinge less on whether the Fed cuts rates at all—and more on how its pace compares to the rest of the world.

Investment takeaways

For currency investors, the U.S. dollar’s outlook in the second half of 2025 is anything but simple. Slowing inflation, political pressure on the Fed, and a wave of risk-on sentiment have chipped away at some of the greenback’s traditional supports. The Fed’s early move into rate cuts has narrowed the U.S. yield advantage, while recent trade deals and tariff changes have steered capital toward equities and other major currencies. Together, these factors have led many traders to bet on continued dollar weakness.

History shows the narrative can turn quickly. A global slowdown—whether starting in the U.S. or overseas—could reignite safe-haven flows into the dollar, as seen in the mid-2010s and again during the pandemic-era rally from 2021 to late 2022. In periods of stress, the dollar often strengthens even when the Fed is cutting rates, supported by relative U.S. resilience, deep capital markets and exceptional liquidity. That upside risk is often underestimated by those who see only a continued decline ahead.

Against this backdrop, two variables deserve close attention: the Fed’s December decision—whether it delivers a quarter-point or half-point cut—and the pace of policy shifts from other major central banks. Any divergence could set the tone for the dollar’s performance heading into 2026. In short, the greenback’s next move will hinge not on U.S. policy alone, but on how it compares with its peers in a world where trade dynamics, fiscal risks and global growth concerns remain in constant motion.

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