What's Driving the US Dollar's Worst First-Half Performance Since 1986?
The US dollar has experienced an unprecedented decline in the first half of 2025, marking its worst performance since 1986. The dollar index closed at 97.26 after a weekly decline of 1.54%, completing five consecutive months of decline through June. This extended weakness has sent ripples through global commodity markets, particularly affecting metals trading.
"The dollar's persistent decline represents a fundamental shift in market sentiment about US economic prospects relative to global peers," notes Samantha Chen, Chief Currency Strategist at Global Market Research. "We're witnessing a historic realignment that few analysts predicted at the start of the year."
Key Factors Behind the Dollar's Decline
Shifting monetary policy expectations have played a crucial role in the dollar's weakness. Traders have aggressively priced in approximately 75 basis points of Federal Reserve rate cuts for 2025, with the first reduction likely coming in September. This dovish outlook has eroded the dollar's yield advantage that previously attracted international capital.
Economic data has further undermined dollar strength. May consumer spending unexpectedly declined as the effects of pre-tariff purchasing faded. This consumption pullback has raised concerns about the sustainability of US economic growth, particularly as fiscal stimulus effects wane.
Trade tensions have escalated, with the Trump administration terminating negotiations with Canada over digital services taxes. The administration characterized these taxes as a "direct and naked attack on American technology companies," setting the stage for potential new tariffs that could further complicate the economic outlook.
Meanwhile, mild inflation trends have continued, with core PCE remaining below the Fed's 2% target for three consecutive months. This inflation moderation has strengthened the case for monetary easing, further pressuring the dollar.
Global Currency Responses to Dollar Weakness
The euro has been a primary beneficiary of dollar weakness, surging to $1.1705 – its highest level since September 2021. The European currency posted an impressive weekly gain of 1.57%, its strongest weekly performance since mid-May.
"The euro's strength reflects growing confidence in the eurozone's economic resilience and the ECB's commitment to maintaining price stability," explains Dr. Marcus Weber from the European Economic Institute. "While challenges remain, the currency has demonstrated remarkable stability during this period of dollar volatility."
The Japanese yen has shown more complex dynamics, influenced by Tokyo's slowing inflation. Core consumer inflation in Tokyo decelerated significantly in June, though it remains above the Bank of Japan's 2% target. This has maintained expectations for additional rate hikes, contributing to yen stability despite broader currency market fluctuations.
How Are Base Metals Capitalizing on Dollar Weakness?
Most base metals have rallied amid the dollar's decline, with copper emerging as a particularly strong performer. The interconnection between currency values and metals pricing has become increasingly evident during this period of dollar weakness.
LME Copper's Impressive Performance
LME copper posted a remarkable 2.55% weekly gain despite a minor 0.21% overnight decline. This resilience is particularly noteworthy given the seasonal factors that typically pressure prices during early summer.
"Copper has maintained its bullish momentum due to fundamental supply tightness," explains Michael Zhang, Head of Metals Research at Commodity Insights. "Global mine disruptions in Chile and Peru have reduced output by approximately 450,000 tonnes year-to-date, creating a structural deficit that even seasonal demand softness cannot overcome."
Technical analysis indicates copper has maintained momentum above the key psychological support level of $9,000 per tonne, suggesting strong market conviction despite periodic profit-taking. Recent copper price insights suggest this upward trajectory could continue throughout the year. LME warehouse inventories have declined by 22% since January, further tightening the physical market.
Other Base Metals Performance
The broader base metals complex has shown generally positive but mixed performance:
| Metal | Overnight Change | Weekly Performance | Key Support Level |
|---|---|---|---|
| Aluminum | +0.45% | +1.76% | $2,350/tonne |
| Lead | +0.15% | +0.88% | $2,100/tonne |
| Zinc | +0.38% | +1.25% | $2,750/tonne |
| Tin | -0.55% | -0.32% | $31,500/tonne |
| Nickel | -0.12% | +0.68% | $16,800/tonne |
Lower energy costs have particularly benefited aluminum, which has energy-intensive production processes. With oil prices declining sharply, production margins have improved for many smelters, potentially increasing supply in coming months.
Shanghai Futures Exchange (SHFE) Metals Overview
The SHFE has shown mixed but generally positive performance across its metals contracts, with most base metals posting gains despite seasonal headwinds:
- Copper rose 0.23%, showing resilience despite typical summer slowdown
- Nickel increased 0.41%, outperforming several other metals
- Aluminum edged up 0.02%, maintaining stability
- Zinc added 0.16%, showing modest strength
- Tin declined 0.59%, bucking the overall positive trend
- Lead fell 0.15%, showing minor weakness
Chinese domestic prices have largely tracked international trends, though the arbitrage window between LME and SHFE copper has narrowed to under $80/tonne, its tightest level since November 2024.
Why Are Ferrous Metals Showing Exceptional Strength?
The ferrous metals sector has demonstrated particularly strong performance, outpacing many non-ferrous metals despite similar macroeconomic conditions. This divergence highlights the unique supply-demand dynamics affecting different segments of the metals market.
Strong Performance Across the Ferrous Complex
Iron ore gained 0.63% overnight, continuing its impressive Q2 run that has seen prices increase by over 15% since April. This strength comes despite concerns about Chinese property sector weakness, suggesting other demand factors are compensating. Detailed iron ore analysis indicates that infrastructure spending continues to support demand.
Stainless steel rose 0.71%, benefiting from nickel's relative stability and strong demand from the renewable energy sector. Solar installation components and energy storage systems have created a new demand vector for high-quality stainless products.
Rebar posted the strongest gain at 1.04%, reflecting infrastructure spending that has offset residential construction weakness. Government-backed projects across Asia have maintained steel demand despite property market headwinds.
Hot-rolled coil (HRC) added 0.83%, driven by manufacturing sector recovery and automotive production increases. Electric vehicle production, which requires approximately 15% more steel than conventional vehicles, has created additional demand pressure.
The raw materials for steelmaking showed particular strength, with coking coal jumping 1.68% and coke rising 1.28%. Supply constraints in Australia due to flooding earlier in the year have created persistent tightness in the coking coal market.
China's Steel Sector Dynamics
China's steel production has remained robust despite environmental restrictions, with capacity utilization rates holding steady around 85-87%. This represents a slight decline from 2024 levels but remains historically high.
"China's steel sector is undergoing a transformation rather than a contraction," notes Dr. Li Wei, industry analyst at Beijing Metals Consulting. "While total output may have plateaued, we're seeing a decisive shift toward higher-value, specialized steel products that command premium pricing."
Recent reports on China steel market challenges highlight the ongoing transformation in this sector. Seasonal demand patterns typically show strengthening in early Q3 as construction activities accelerate post-rainy season. Current inventory levels at Chinese steel mills are approximately 15% below five-year averages, suggesting potential for restocking-driven price support.
Why Are Precious Metals Bucking Historical Trends?
Despite the dollar's weakness, which typically supports precious metals, both gold and silver have experienced consecutive weekly declines, breaking from their historical inverse relationship with the dollar. This unusual divergence has puzzled many market observers.
Gold's Surprising Weakness
COMEX gold fell 1.85% overnight, marking a 2.94% weekly loss. This represents the second consecutive week of declines despite favorable currency conditions that would normally boost gold prices.
"What we're witnessing is a fundamental shift in gold's correlation with traditional drivers," explains Dr. Jasmine Singh, precious metals strategist at Capital Markets Research. "The anticipation of Fed rate cuts has been priced in for months, and investors are now focusing on economic recovery signals that favor risk assets over safe havens."
SHFE gold declined 0.89% overnight with a 1.88% weekly drop, mirroring international trends. Chinese investor sentiment has shifted toward equities and industrial metals that might benefit more directly from economic stimulus measures.
Market Insight: "Gold's historical negative correlation with the US dollar (-0.67 over the past decade) has temporarily broken down, registering just -0.23 in Q2 2025. This decoupling typically occurs during transitional monetary policy phases and often resolves within 2-3 quarters." — Global Precious Metals Review, June 2025
Silver's Mixed Performance
COMEX silver dropped 2.06% overnight with a moderate 0.5% weekly decline, showing somewhat more resilience than gold. This relative outperformance reflects silver's dual role as both a precious metal and an industrial commodity.
SHFE silver fell 1.04% overnight but managed a 0.61% weekly gain, showing divergence from international markets. Domestic industrial demand in China, particularly from the photovoltaic sector, has provided underlying support.
The gold-to-silver ratio has expanded to 84:1, well above the 10-year average of 76:1, suggesting silver may be undervalued relative to gold based on historical relationships. Recent gold-silver ratio insights suggest this widening ratio often precedes periods of silver outperformance.
Investment Implications for Precious Metals
Portfolio positioning amid dollar weakness has traditionally favored increased precious metals allocation, but current market conditions suggest a more nuanced approach. Investors have reduced gold ETF holdings for nine consecutive weeks, with outflows totaling approximately 95 tonnes since April.
Central bank purchasing has remained steady but hasn't accelerated as many analysts expected. Official sector gold accumulation is running approximately 8% below 2024 levels, though it remains well above the pre-2020 historical average.
What's Behind Oil's Dramatic Weekly Collapse?
Crude oil has experienced a dramatic decline, with both major benchmarks posting their largest weekly drops since March 2023. This collapse has occurred despite the dollar's weakness, which typically supports commodity prices.
Factors Driving Oil's Largest Weekly Drop Since March 2023
OPEC's planned production increase of 411,000 barrels per day in August represents a significant supply addition. Even more concerning for oil bulls, the cumulative 2025 supply increase from OPEC will total 1.78 million barrels per day, equivalent to over 1.5% of global demand.
"OPEC's decision signals confidence that demand can absorb additional supply, but markets are questioning whether that confidence is justified given mixed economic signals," notes energy economist Dr. Ahmed Al-Farsi. "The timing of these production increases, coinciding with seasonal demand peaks, suggests a strategic effort to cap price rallies rather than crash the market."
Geopolitical de-escalation between Israel and Iran has eased supply disruption concerns that had previously supported a risk premium in oil prices. The ceasefire agreement, while fragile, has removed approximately $5-7 per barrel of geopolitical premium according to most analyst estimates.
Recent oil price collapse analysis suggests additional factors may be at play. US Strategic Petroleum Reserve delivery delays have added complexity to the market outlook. The Department of Energy has postponed scheduled deliveries by seven months due to maintenance requirements, creating uncertainty about the timing of government demand.
Adding to supply concerns, Baker Hughes data shows US oil and gas rig counts have declined to 547, the lowest level since October 2021. This suggests potential future supply constraints in US production, though current output remains near record levels.
Weekly Performance Metrics
WTI crude plummeted 11.88% for the week, closing at its lowest level since February. Technical analysis indicates significant damage to the price structure, with WTI breaking below both the 100-day and 200-day moving averages.
Brent crude collapsed 12.11% weekly, erasing all gains made since January. Support levels around $72-73 per barrel will be closely watched by traders looking for potential stabilization.
This sharp decline represents a notable divergence from the typical dollar-oil relationship. Historically, a 1% decline in the dollar index correlates with approximately a 2-3% increase in oil prices, but this relationship has completely broken down in the current market environment.
Energy Market Implications for Metals
The oil price collapse has significant implications for metals production costs. Aluminum smelting, which requires approximately 13-14 MWh of electricity per tonne of metal produced, could see production costs decline by $30-45 per tonne in regions reliant on fossil fuel power generation.
Transportation and logistics costs, which typically account for 5-8% of delivered metal prices, may also decline if fuel prices remain depressed. This could particularly benefit bulk commodities like iron ore and coal, where shipping represents a larger portion of the final price.
How Is China's Monetary Policy Affecting Metals Markets?
China's monetary policy stance has emerged as a crucial factor supporting metals prices despite headwinds in other economic indicators. The PBOC's accommodative approach has created favorable conditions for metals demand and investment.
PBOC's "Moderately Loose" Monetary Stance
The People's Bank of China reaffirmed its commitment to "moderately loose monetary policy" during its June 23 meeting. This stance includes implementing counter-cyclical adjustments to ensure adequate market liquidity and credit availability.
"China's monetary approach represents a stark contrast to the cautious pivots we're seeing from Western central banks," explains Dr. Lin Xiaofeng, monetary policy analyst. "While the Fed and ECB are carefully calibrating the timing of their first cuts, the PBOC has already deployed multiple easing measures with more likely to come."
The PBOC has utilized both quantitative and structural monetary policy tools, including reserve requirement ratio (RRR) cuts and targeted medium-term lending facilities (MLF) to channel funds toward manufacturing and infrastructure sectors that drive metals demand.
China's low inflation environment, with CPI running below 1% for four consecutive months, provides significant policy flexibility compared to Western economies still grappling with above-target inflation. This has allowed more aggressive stimulus without typical inflationary concerns.
Chinese Regulatory Changes Affecting Markets
Chinese stock exchanges have proposed adjustment of price limits for risk-warning stocks, potentially allowing 10% daily movements versus the current 5% limit. This regulatory change aims to improve market efficiency and price discovery while maintaining necessary safeguards.
"These regulatory adjustments, while seemingly technical, signal Beijing's broader commitment to capital market reforms and increased market dynamism," notes financial regulation expert Zhang Wei. "The resulting improvement in liquidity could benefit commodities-linked equities and eventually feed through to futures markets."
Investor sentiment indicators have shown improvement, with the China Securities Investor Confidence Index rising for three consecutive months. Increased retail and institutional participation in both equity and commodity futures markets has provided additional liquidity and price support.
What Critical Economic Data Should Metals Investors Monitor?
The coming week brings numerous high-impact economic releases that could further influence dollar performance and metals markets. Understanding these data points and their potential market impact is crucial for metals investors navigating this volatile environment.
Key Global Economic Releases for Early July
Manufacturing PMIs will provide critical insight into industrial activity across major economies. China's official and Caixin manufacturing PMIs, due July 1, will be particularly scrutinized for signs of industrial demand trends in the world's largest metals consumer.
"PMI figures have historically shown an 85% correlation with metals price movements over the subsequent 4-6 weeks," explains econometric analyst Dr. Jessica Williams. "For copper specifically, a one-point change in China's manufacturing PMI typically correlates with a 3-4% price movement in the same direction over the following month."
US labor market data, including non-farm payrolls, unemployment rate, and JOLTs job openings, will provide insight into economic momentum and potential Fed policy shifts. Particularly strong or weak numbers could significantly impact dollar trajectory and, by extension, metals prices.
Inflation metrics from the eurozone, Germany, and Switzerland will influence ECB policy expectations and euro performance. With the euro already strengthening against the dollar, further favorable inflation data could accelerate this trend and provide additional support for dollar-denominated metals prices.
Market Calendar Considerations
Several market closures will affect trading dynamics in early July:
- Hong Kong markets will be closed July 1 for Hong Kong Special Administrative Region Establishment Day
- US markets will close early on July 3 and remain fully closed on July 4 for Independence Day
These closures may create liquidity constraints and potentially increase volatility, particularly if significant economic data or geopolitical developments occur during reduced trading hours.
Central Bank Communications to Watch
Federal Reserve officials Bostic (Atlanta) and Goolsbee (Chicago) are scheduled to speak, potentially providing insights into the Fed's reaction function and timeline for policy easing. Markets will scrutinize these
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