USD Devaluation Analysis: 10% H1 2025 Decline and AI Bubble Concerns

This analysis is based on a Reddit post [0] published on November 14, 2025, claiming USD devaluation of 10% in H1 2025 and questioning S&P 500 gains in light of potential AI bubble formation. The post’s core assertions have been verified against multiple authoritative financial sources.

The Reddit post’s central claim about USD devaluation is substantially accurate. Morgan Stanley Research confirms the U.S. dollar index fell approximately 11% in H1 2025, marking its worst performance since 1973 [1]. This decline ended a structural bull cycle for the dollar that began in 2010 and delivered approximately 40% cumulative gains [1]. Cresset Capital corroborates this assessment, noting the dollar experienced its worst nine-month start since 1986 and worst trade-weighted start since 1973 [2].

The dollar weakness stems from multiple interconnected factors:

• Policy Uncertainty
  : Trump-era economic policies and trade tensions created investor unease [2]
• Monetary Policy Convergence
  : The Fed resumed rate cuts while other central banks signaled their cutting cycles might end, reducing the dollar’s yield advantage [2]
• Fiscal Concerns
  : Rising U.S. deficits and debt sustainability worries [3]
• Foreign Investor Behavior
  : European investors alone hold $8 trillion in U.S. assets, with increased hedging activity accelerating dollar selling [1]

The Reddit post’s assertion about S&P 500 gains being eroded by FX effects is mathematically sound. S&P 500 nominal returns of +5.11% in H1 2025 (January 2: $5,903.26 → June 30: $6,204.94) [0] would indeed be largely offset by the ~11% dollar depreciation. This creates a significant divergence between nominal and real returns for international investors.

For context, historical S&P 500 average annual returns are 10.11% nominal and 6.84% real (inflation-adjusted) [4], with the 20-year average real return at 8.413% [4]. The dollar’s 11% decline in H1 2025 significantly exceeded typical annual inflation rates, creating unusual currency headwinds.

The Reddit post’s AI bubble concerns have substantial merit. Market data reveals extreme concentration:

• AI-related capital expenditures surpassed U.S. consumer spending as the primary GDP growth driver in H1 2025, accounting for 1.1% of GDP growth [5]
• AI-related stocks have accounted for 75% of S&P 500 returns, 80% of earnings growth, and 90% of capital spending growth since ChatGPT’s launch in November 2022 [5]
• Nearly two-thirds of U.S. venture capital deal value went to AI and Machine Learning startups in H1 2025, up from 23% in 2023 [5]

The dollar weakness and AI concentration are not isolated phenomena but interconnected market dynamics. Foreign investors holding over $30 trillion in U.S. assets [1] face dual pressures: currency depreciation losses and sector concentration risks. The MSCI EAFE Index returned 18.1% in local currencies through October 6, 2025, but U.S. investors earned 28.1% after currency conversion benefits [6], highlighting the magnitude of currency effects.

The current environment differs from previous market cycles in several key respects:

1. Currency Impact Scale
   : The dollar’s decline represents the worst performance in over 50 years, creating unprecedented currency headwinds [3]
2. Sector Concentration
   : AI’s 75% contribution to S&P 500 returns exceeds typical sector dominance levels [5]
3. Investor Behavior
   : European investors are increasingly hedging their $8 trillion in U.S. holdings, potentially creating a feedback loop of dollar weakness [1]

Morgan Stanley projects an additional 10% dollar decline by end-2026 [1], suggesting current currency pressures may persist. BlackRock notes that while current tech valuations differ from the dot-com era with better earnings support [7], the extreme concentration still creates vulnerability.

• Policy Uncertainty
  : Ongoing trade policy changes and fiscal debates may significantly impact currency stability and market volatility [2]
• Foreign Investor Behavior
  : The potential for accelerated dollar selling as more foreign investors hedge their $30+ trillion in U.S. assets [1]
• AI Concentration Risk
  : Heavy market reliance on AI-related stocks (75% of S&P 500 returns) creates vulnerability to AI sector corrections [5]

• Import Price Pressures
  : Dollar weakness could reignite inflation concerns through higher import prices [1]
• Corporate Earnings Impact
  : Currency translation effects may impact multinational company earnings reports
• Market Correction Potential
  : The combination of currency weakness and sector concentration increases systemic risk

Key indicators to watch include:

• DXY Index Levels
  : Monitor for breaks below key support levels around 97 [2]
• Fed Policy Statements
  : Changes in interest rate guidance affecting dollar yield advantage [3]
• Foreign Holdings Data
  : Track changes in hedging behavior among major foreign investors [1]
• AI Investment Metrics
  : Monitor AI capital expenditure sustainability and earnings quality [5]

The analysis reveals that the Reddit post’s claims about USD devaluation and AI bubble concerns are well-founded. The dollar’s 11% decline in H1 2025 represents the worst performance since 1973, effectively erasing S&P 500 nominal gains of 5.11% for international investors. AI-related investments have become extremely concentrated, accounting for 75% of S&P 500 returns since late 2022, creating significant market vulnerability.

With over $30 trillion in U.S. assets held by foreign investors [1] and Morgan Stanley projecting an additional 10% dollar decline by end-2026 [1], the convergence of currency depreciation and sector concentration creates a complex risk environment. Traditional historical relationships may not hold in this unprecedented environment, warranting careful monitoring of policy developments and market dynamics.