Global Currency Markets React to U.S. Dollar Decline and Geopolitical Tensions

Mon, June 30, 2025

U.S. Dollar Hits Three-Year Low Amid Political Uncertainty

The U.S. dollar has fallen to its lowest value in three years, decreasing about 10% this year, sparking concerns about the U.S. economy’s strength and global confidence. This depreciation makes U.S. exports more competitive, benefiting exporters, but increases the cost of imports and international travel for Americans. The euro, in contrast, has climbed to a near four-year high. 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 the “Big, Beautiful Bill,” which could add over $2.5 trillion to federal debt. The uncertainty is compounded by speculation over a new Federal Reserve Chair and pressure from Trump for lower interest rates. Experts argue that the dollar was projected to decline regardless of the 2024 election outcome. Economist Kenneth Rogoff notes the fall aligns with historical dollar cycles but admits Trump’s policies have hastened its decline. While manufacturers may benefit from cheaper U.S. exports, fewer foreign investments could hurt the labor market, impacting the current low 4.2% unemployment rate.

Central Banks Diversify Reserves Away from U.S. Dollar

A recent report by the Official Monetary and Financial Institutions Forum (OMFIF) reveals that 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, including policies introduced by U.S. President Donald Trump. The 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 dollar, once the most favored currency, dropped to seventh place in popularity, with 70% of respondents citing the U.S. political environment as a deterrent. 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%. Analysts believe the euro could regain a 25% share of global reserves, recovering ground lost during the eurozone crisis, especially if the EU strengthens its bond market and capital integration. Despite the diversification, the dollar is still expected to maintain a dominant 52% share of reserves by 2035, down from 58% today.

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, aimed at maintaining the currency peg, will reduce liquidity in the banking system and has already pushed the overnight interbank lending rate to 0.0375%, its highest since mid-May. 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. Experts also suggest that the HKMA’s action is part of a normalization process in interest rate differentials, with no immediate risk to the peg or a significant rise in Hibor due to high system liquidity and a low loan-to-deposit ratio. This was the second intervention in two months, illustrating continued volatility and pressure on Hong Kong’s fixed exchange rate policy.

Emerging Markets Experience ‘Goldilocks’ Moment

PIMCO, a major bond fund managing $2 trillion in assets, views emerging markets (EM) as being in a “Goldilocks” moment, citing favorable conditions due to U.S. President Donald Trump’s unpredictable policies that have weakened the dollar and spurred a shift away from U.S. investments. Pramol Dhawan, head of EM portfolio management, noted a significant rotation of capital toward emerging markets, with PIMCO holding $70 billion in EM assets. The trend is driven by concerns over U.S. debt, import tariffs, and declining confidence in the U.S. government. As a result, EM local currency debt has seen record inflows, and emerging market stocks are outperforming the S&P 500 by 10 percentage points in 2025. EM local currency bonds also returned over 11% in dollar terms. The shift, Dhawan emphasized, reflects a more internationally focused search for yield amid dollar depreciation. Net capital inflows to EMs are projected to reach $935 billion in 2026, up from $887 billion in 2025. Dhawan remains optimistic about sustained flows regardless of future U.S. policy changes, highlighting the robust fundamentals and maturing institutional investor base in emerging markets.

Geopolitical Tensions Impact Asian Currencies

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 of 11 respondents, 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.

Political uncertainty has weakened support for the Thai baht as Prime Minister Paetongtarn Shinawatra faces criticism over a border dispute with Cambodia, leading to coalition instability. Meanwhile, the Bank of Thailand left interest rates unchanged.

The poll captures investor positioning in nine Asian currencies and highlights shifting market dynamics in response to geopolitical tensions and differing monetary policies.

Conclusion

The global currency markets are experiencing significant shifts influenced by a combination of political decisions, economic policies, and geopolitical tensions. The decline of the U.S. dollar, central banks’ diversification strategies, and regional interventions underscore the complex and interconnected nature of the global financial system. Investors and policymakers alike must navigate these turbulent waters with caution, staying informed and adaptable to the ever-changing landscape.

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