A Half-Century of the US Dollar: Cycles, Strength, and Surprises

An examination of the US dollar’s performance over the last half-century reveals a narrative far more complex than simple appreciation or decline. Its trajectory is a story of long, oscillating cycles, where periods of pronounced strength are followed by sustained weakness, often confounding predictions of its imminent demise. Since the collapse of the Bretton Woods system in the early 1970s, the dollar’s value against its major trading partners has been a function of shifting monetary policy, geopolitical manoeuvres, and its unique structural role in the global financial system.

The Great Cycles: From Volcker Shock to Fiscal Largesse

The history of the US Dollar Index (DXY) is not a random walk. It is punctuated by distinct eras. The most dramatic rally occurred in the first half of the 1980s, when Federal Reserve Chair Paul Volcker’s aggressive interest rate hikes to combat inflation pushed the DXY to its all time high above 160. This extreme strength prompted a coordinated response from global finance ministers in the 1985 Plaza Accord, a landmark agreement to devalue the dollar to support US competitiveness.¹

What followed was a protracted period of dollar weakness, which persisted with cyclical interruptions until the late 1990s. The dot-com boom, representing a period of exceptional US economic outperformance, fuelled the next major upswing. Conversely, the years following the 2008 Global Financial Crisis saw the dollar weaken as the Federal Reserve deployed unprecedented quantitative easing, leading many to believe a structural debasement was underway. Yet, the dollar demonstrated remarkable resilience, strengthening again as the US economy recovered faster than its peers, a phenomenon often described as being the “cleanest dirty shirt in the laundry”.

The most recent cycle began in 2021, culminating in a powerful rally through 2022 as the Federal Reserve initiated its most rapid tightening campaign in decades, creating a significant yield advantage over currencies like the Euro and Yen. This history shows that predictions of the dollar’s terminal decline are consistently premature; its value is determined more by relative dynamics than an absolute trajectory.

A Fifty-Year Performance Snapshot

Highlighting specific years illustrates the sheer volatility and cyclicality of the world’s primary reserve currency. The data refutes any notion of a stable or predictable path.

Source: Data compiled from Macrotrends and Trading Economics historical charts.^{2, 3}

The Structural Pillars and Persistent Questions

The dollar’s enduring strength is underpinned by several structural factors that are difficult to dislodge. It remains the dominant currency for invoicing international trade, meaning commodities like oil are priced in dollars globally. Furthermore, it accounts for the lion’s share of identified global foreign exchange reserves, despite a slow diversification trend over the last two decades.⁴ The depth and liquidity of US capital markets are unparalleled, making them the default destination for global savings, particularly during times of stress.

This creates the “dollar smile” dynamic, first articulated by strategists at Morgan Stanley. The dollar tends to strengthen at two extremes: when the US economy is outperforming the rest of the world, attracting investment flows, and during a global downturn, when investors flock to the safety of US Treasury bonds. It is in the middle ground, during periods of stable, synchronised global growth, that the dollar typically weakens.

The narrative of de-dollarisation, while a perennial topic of discussion, often overstates the immediate threat. The lack of a viable, scalable alternative is the most significant barrier. Neither the euro, with its fragmented fiscal structure, nor the Chinese yuan, with its capital controls and lack of institutional transparency, can currently replicate the network effects and trust associated with the dollar.

Implications for Investors

Understanding these long-term cycles is crucial for asset allocation. A strengthening dollar is typically a headwind for US corporate earnings from multinational firms and can place immense pressure on emerging markets with significant dollar-denominated debt. Conversely, a weakening dollar can provide a tailwind for commodities and international equities.

The key forward-looking question is whether the recent dollar strength driven by Fed tightening will revert to a longer-term weakening trend as policy normalises, or if new structural forces, such as onshoring and geopolitical fragmentation, will create a new paradigm of sustained dollar demand. My speculative hypothesis is that the market consistently underestimates the dollar’s capacity for sharp, reflexive rallies. While the consensus may lean towards a gentle decline, the greatest risk lies in a geopolitical or economic shock that triggers a flight to safety, catching portfolios positioned for a weaker dollar entirely off-guard. The dollar’s history teaches us that its periods of calm are often just interludes between significant repricing events.

References

1. The Guardian. (2025, June 30). US dollar slides to worst first-half performance in over 50 years. The Guardian is cited for its historical reference to the Plaza Accord’s impact, not its speculative 2025 reporting.
2. Macrotrends. (n.d.). US Dollar Index – 54 Year Historical Chart. Retrieved from https://www.macrotrends.net/1329/us-dollar-index-historical-chart
3. Trading Economics. (n.d.). United States Dollar Index. Retrieved from https://tradingeconomics.com/united-states/currency
4. Statista. (2023, September). Share of the U.S. dollar in allocated foreign exchange reserves worldwide from 1st quarter 2017 to 2nd quarter 2023. Retrieved from https://www.statista.com/statistics/1404145/us-dollar-index-historical-chart/