Global Currency Markets React to U.S. Dollar Weakness Amid Policy Shifts

U.S. Dollar Nears Multi-Year Lows Amid Policy Uncertainty

The U.S. dollar is hovering near its lowest levels since February 2022 against major global currencies. This decline is influenced by dovish comments from Federal Reserve Chair Jerome Powell and President Donald Trump’s expansive tax-and-spending bill. Powell emphasized a cautious approach to further interest rate cuts, leaving room for potential reductions depending on upcoming economic data. Despite a slight uptick from Tuesday’s lows due to strong labor data, the dollar index remained weak around 96.744. Trump’s proposed legislation, which could add $3.3 trillion to the national debt, is causing concern over fiscal sustainability and exerting downward pressure on the dollar. Additionally, Trump’s direct criticisms of Powell and interference with the Fed’s policies have cast doubts on the central bank’s independence. Currency movements reflected these concerns: the dollar remained low against the Swiss franc and euro, was steady against the British pound, and regained minimal ground against the yen. Analysts suggest that continued fiscal expansion and political pressure on the Fed may further weaken the greenback over time. Dollar wallows near 3-1/2-year low as Fed easing, Trump bill in focus

Analysts Predict Continued Pressure on the Dollar

A Reuters poll of foreign exchange analysts indicates that the U.S. dollar is expected to remain weak in the coming months due to a combination of growing concerns over U.S. debt, unpredictable tariff policies, and increasing expectations of interest rate cuts. A $3.3 trillion tax-cut and spending bill, along with fluctuating trade tariffs, has led to significant investor outflows from dollar assets. The term premium has surged, contributing to an 11% decline in the dollar index (DXY) and pushing the dollar to a three-and-a-half-year low against the euro and sterling. The Commodity Futures Trading Commission reports that short positions on the dollar are near a two-year high, implying further potential weakness. A majority of analysts expect this positioning to persist or increase. The euro, buoyed by stronger performance, is forecast to reach $1.20 in a year. Key factors influencing the dollar include upcoming tariff negotiations, with 37% of respondents citing them as the main driver. Other influential factors include interest rate differentials, portfolio diversification, and debates over Federal Reserve independence. Analysts suggest persistent structural factors are driving the dollar’s decline. U.S. dollar to stay under pressure from tariff, debt and rate cut expectations: Reuters poll

Mexican Peso Faces Potential Decline Post Tariff Freeze Expiry

The Mexican peso, which has seen a 13.2% rise this year, is predicted to decline moderately by 5.5% over the next 12 months to 19.80 per dollar, according to a Reuters poll of 22 foreign exchange experts. This expected dip follows the imminent expiration of a temporary U.S. tariff hike freeze, which had supported the peso’s recent recovery. Contributing factors to the peso’s strength included relatively mild new U.S. trade rules under President Trump’s administration and a weaker U.S. dollar. Despite ongoing global trade tensions with China, the EU, and Japan, Mexico is spared from reciprocal tariffs, which helps stabilize the currency. Analysts suggest that the USMCA trade agreement and favorable interest rate differentials will help cushion the peso’s fall. In contrast, other Latin American currencies show mixed trends: Brazil’s real is forecast to depreciate 4% amid high local interest rates, while Argentina’s peso could decline 17%, remaining within government projections despite ongoing economic struggles. Mexico peso set to slip after expiry of US tariff hike freeze

India’s Rupee Volatility Spurs Increased Hedging

Since RBI Governor Sanjay Malhotra took office in December 2024, the Reserve Bank of India has exhibited increased tolerance for rupee volatility, significantly reducing its intervention in the forex market. As a result, daily trading ranges have nearly tripled, and key volatility indicators have doubled. This policy shift has incentivized Indian companies, especially small and mid-sized businesses, to adopt more proactive hedging strategies to protect against currency fluctuations. Data from the Clearing Corporation of India shows a surge in forward contracts used by exporters and importers between December and May, marking the highest six-month total since 2020. Treasury executives from institutions like ICICI Bank and small firms noted a substantial rise in hedge ratios and reduced use of complex derivatives. According to former RBI chief Duvvuri Subbarao, this move enhances financial system resilience and mitigates systemic risk by encouraging better corporate risk management. With the rupee fluctuating widely between 83.77 and 87.95 per dollar, companies like Hari Krishna Exports now hedge up to 90% of their forex exposure, compared to 60–70% previously. The RBI’s lighter intervention has driven a broader appreciation of forex risk and reduced reliance on exotic hedging instruments. India’s new light touch on FX volatility spurs hedging ramp-up

Central Bankers Affirm Dollar’s Dominance

Central bankers gathered at an annual conference in Sintra, Portugal, indicated that any major challenge to the U.S. dollar’s status as the dominant global reserve currency remains distant. Despite concerns arising from U.S. President Donald Trump’s unpredictable economic, trade, and security policies, the dollar still accounts for 58% of global reserves—well above the euro’s 20%. European Central Bank President Christine Lagarde suggested 2025 could be viewed as a pivotal year potentially favoring the euro, but emphasized that significant change would require time, reform, and effort. Bank of Japan Governor Kazuo Ueda and Bank of England Governor Andrew Bailey echoed this sentiment, citing the need for structural reforms and a reliable supply of safe assets, respectively. Bank of Korea Governor Rhee Chang-yong acknowledged increasing discussion about diversification away from the dollar but noted that central banks were still largely retaining their dollar holdings while exploring hedging strategies. Lagarde also emphasized that for the euro to strengthen its global role, Europe must deepen its capital markets, bolster its legal structure, and commit to open trade coupled with security capabilities. Challenge to dollar supremacy a long way off, central bankers say

British Pound Remains Resilient Amid Political Turmoil

On Wednesday, the British pound slightly declined against the U.S. dollar but remained near its highest level in nearly four years, a result of the dollar’s recent weakness. Despite a significant political episode in the UK, where Prime Minister Kier Starmer faced his largest parliamentary rebellion and had to reverse parts of a controversial benefit-cutting plan, investors remained largely unfazed. Market attention shifted instead toward comments by Bank of England Governor Andrew Bailey, who suggested a potential slowdown in the bank’s quantitative tightening strategy. Analysts believe this shift has alleviated some pressure on long-term gilt markets, indirectly supporting sterling. The pound slipped 0.35% against the dollar and also weakened slightly against the euro, which reached a two-month high at 85.98 pence. Other European currencies, including the euro and Swiss franc, are also experiencing multi-year highs. Limited UK economic data is expected later in the day, though attention will be on BoE policymaker Alan Taylor’s upcoming speech at the ECB conference. Taylor had previously supported a rate cut, and markets are now anticipating a possible rate cut by the BoE in their next meeting, although it is not yet fully anticipated by investors. Sterling nudges lower but still near multi-year highs, looking past UK politics

In summary, the global currency markets are experiencing significant shifts, primarily influenced by U.S. policy decisions and their ripple effects worldwide. Investors and policymakers alike are closely monitoring these developments to navigate the evolving financial landscape.