The U.S. dollar-denominated money supply grew 3.87% in Q2 2025. Meanwhile, the U.S. Dollar Index (DXY) dropped 7.03% – one of its sharpest quarterly declines in recent history.
This dramatic drop in the dollar didn't just shake currency markets — it amplified the rise in global M2 when measured in dollars. With foreign currencies strengthening against the greenback, even modest increases in local currency M2 looked much bigger in dollar terms. When measured at constant exchange rates, global M2 only rose 1.19%, a much tamer pace.
The domestic trend is striking. M2 money supply, which includes physical currency, checking deposits, savings accounts, money market funds, and time deposits, hit a record $22 trillion.
The data indicates a year-over-year growth of 4.5%, pushing it beyond the previous peak of $21.86 trillion set in March 2022 — the height of the post-COVID monetary flood. While the current growth is below the long-run average of 6.3%, it's still an impressive jump, especially considering the Federal Reserve hasn't cut rates and has continued shrinking its balance sheet.
It's Not The Speed, It's the Acceleration
M2 is a broader measure than just "cash" and serves as a crucial indicator of liquidity in the system. However, its growth alone doesn’t necessarily drive inflation.
SP 500 and M2 Money Supply, 2015-2025, Source: TradingView
The data from the 2010s shows an apparent rise of domestic M2, yet it was accompanied by inflation averaging 1.7% per year, well within the target parameters. That's where the velocity of money comes in — the rate at which money changes hands. Even if M2 grows, if people aren't spending or investing, then that money sits idle. Currently, M2 velocity is slightly declining, indicating that money is circulating more slowly than before.
A growing money supply with a stagnant or falling velocity is like pouring water into a sponge instead of a pipe — it gets absorbed rather than flowing through the system. This could explain why inflation hasn't reignited despite the growing cash pile.
Multiple factors are at play: tighter bank lending standards, high interest rates, and cautious consumers, especially older generations, who are "revenge saving" instead of spending. Personal savings rates are climbing, further dragging down velocity.
Tariffs and De-dollarization
Tariffs are an essential part of nearly every economic discussion in 2025. They can indirectly boost M2 by keeping dollars from leaving the U.S. economy. When tariffs make imports more expensive, domestic production becomes relatively more attractive, and the dollars that would've gone overseas now stay stateside, padding the domestic money supply.
Besides tariffs, there is a risk of de-dollarization. The risk of global trade shifting away from the dollar is noticeable, and if this trend persists, many of those foreign dollars will likely find their way back home.
Historically, U.S. trade deficits allowed the country to export its currency, with foreign nations holding onto dollars for trade settlement or as reserves. These dollars weren't part of M2 because they were held abroad.
But if foreign countries pivot away from the dollar, foreign holders of the dollar will find fewer places willing to accept it.
Yet, they could always get rid of them by buying U.S. goods and services, thus increasing domestic M2. These returned dollars go back into circulation, creating a form of monetary expansion independent of the Federal Reserve’s policy stance.
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