The US Dollar (USD) has recorded its weakest start to the year since 1973, but Bank of America (BoFA) analysis suggests that the currency's depreciation pressure may be more limited in the second half of 2025.
Through a time zone analysis framework, BoFA found that while overall USD price movements are no longer closely correlated with expectations of a Federal Reserve (Fed) interest rate cut, cumulative USD returns during US trading hours still maintain a positive correlation of 71% with the Fed's interest rate outlook in 2025.
BoFA noted that the Fed's expected interest rates to remain unchanged throughout the year are expected to continue to support the USD moderately during the US trading session.
Investors in Asia have been the biggest USD sellers so far in 2025. However, longer-term analysis shows that USD price movements during Asian trading hours have begun to level off after the long returns of the past two years have gradually returned to neutral levels. BoFA expects Asian investors to wait for a new, more negative catalyst from other time zones before pushing the USD lower again.
The USD still has the potential to weaken further in European trading hours, but this is only expected to happen if global equity markets outperform US markets for the rest of the year. Foreign investors now have less incentive to increase their currency hedging ratios against US-based assets after the USD’s decline throughout the year.
While global equities outperformed US markets in the first quarter of 2025, the US returned to the lead in the second quarter. BoFA said that the relative performance of stock markets will be the main focus for investors in the second half of the year.
