Global Currency Markets React to Geopolitical Tensions and Economic Shifts

Global Currency Markets React to Geopolitical Tensions and Economic Shifts

As of June 29, 2025, the global currency markets are experiencing significant fluctuations influenced by geopolitical tensions, central bank policies, and economic developments.

U.S. Dollar Declines Amid Economic Concerns

The U.S. dollar has fallen to its lowest value in three years, decreasing about 10% this year. This depreciation raises concerns about the U.S. economy’s strength and global confidence. While a weaker dollar makes U.S. exports more competitive, it increases the cost of imports and international travel for Americans. Factors contributing to the dollar’s decline include investor apprehensions over economic stability, potential recession, and U.S. policies under President Donald Trump, including tariffs and significant federal debt increases. Experts note that the dollar’s fall aligns with historical cycles but suggest that current policies have hastened its decline. U.S. Dollar Dips to Three-Year Low. Here’s What That Means For You

Central Banks Diversify Reserves Away from U.S. Dollar

Global central banks, managing a combined $5 trillion in reserves, are increasingly diversifying away from the U.S. dollar following recent geopolitical and market upheavals. This shift is boosting interest in gold, the euro, and China’s yuan. A net 40% of central banks plan to increase gold holdings over the next decade, the highest level in five years. The euro is now the most in-demand currency for near-term reserve increases, with a net 16% of banks planning to raise euro holdings, followed closely by the yuan. Over the next decade, the yuan’s share of global reserves could triple to 6%. Despite the diversification, the dollar is still expected to maintain a dominant 52% share of reserves by 2035, down from 58% today. Central banks eye gold, euro and yuan as dollar dominance wanes

Hong Kong Intervenes to Defend Currency Peg

On June 26, 2025, the Hong Kong Monetary Authority (HKMA) intervened in the foreign exchange market, spending HK$9.4 billion (US$1.2 billion) to support the Hong Kong dollar as it approached the lower limit of its trading band at HK$7.85 per US dollar. This move aims to maintain the currency peg and will reduce liquidity in the banking system. The intervention has the potential to disrupt one of the world’s most lucrative carry trades, where investors borrow in low-yielding Hong Kong dollars to invest in higher-yielding US assets. Despite the intervention and rising lending rates, analysts believe the carry trade remains viable due to persistent capital inflows and ongoing demand for the Hong Kong dollar from mainland investors and IPO activity. Hong Kong intervenes to defend currency peg

Asian Currencies Affected by Middle East Conflict

Investor sentiment towards Asian currencies has weakened due to the ongoing conflict between Israel and Iran, which elevated oil prices and bolstered demand for the U.S. dollar as a safe haven. According to a Reuters poll, bullish positions in the South Korean won, Taiwan dollar, Indonesian rupiah, and Malaysian ringgit have slightly declined. Rising oil prices are particularly problematic for oil-importing Asian economies, exacerbating current account deficits. The poll also showed a shift to bearish positions on the Philippine peso for the first time since March, due to its vulnerability to oil shocks and successive interest rate cuts by the central bank to support growth. Additionally, sentiment toward the Indian rupee deteriorated following a substantial rate cut by the central bank and expectations of dividend repatriation pressures. Asia FX bulls retreat after Middle East conflict dents risk appetite: Reuters poll

China’s Currency Policy Amid Global Shifts

China is grappling with a currency trilemma—whether to allow the renminbi (RMB) to appreciate, depreciate, or maintain stability. Despite downside risks associated with appreciation in a sluggish domestic economy, experts argue that a long-term strategy favoring a stronger RMB is essential. A stronger RMB aligns with China’s goals of global currency influence and fostering a multipolar currency system. Stabilizing the exchange rate in the face of US dollar volatility has weakened the RMB against regional currencies, heightening economic imbalances. Depreciation, though potentially boosting exports, risks trade tensions and competitive devaluations. Instead, appreciation could curb China’s trade surplus, reduce savings, and encourage consumption. With the RMB currently undervalued, structural shifts in domestic policy—boosting consumption and reducing unproductive investment—are needed. A stronger RMB supports China’s ambitions in green technology, AI investment, and greater international use of its currency. China needs to take a long-term view and let the renminbi rise

In summary, the global currency markets are navigating a complex landscape shaped by geopolitical tensions, economic policies, and strategic shifts by central banks. Investors and policymakers alike are closely monitoring these developments to adapt to the evolving financial environment.