Global Currency Markets React to U.S. Dollar's Decline Amid Trade Policy Shifts

Sun, June 15, 2025

U.S. Dollar Hits Three-Year Low Amid Trade Policy Uncertainty

The U.S. dollar has fallen to its lowest level in three years, declining nearly 10% in 2025 against a basket of major currencies. This drop is driven by shifting U.S. trade policies and mounting expectations for Federal Reserve interest rate cuts, prompting capital outflows. Scandinavian currencies have been top performers, with Sweden’s crown up 14% and Norway’s up nearly 12%, mainly reflecting dollar weakness more than inherent strength. Traditional safe-haven currencies like the euro, Swiss franc, and Japanese yen are up about 10%, but strong appreciation has raised concerns about deflation and central bank responses, especially in Switzerland and the eurozone. In Asia, currencies including Taiwan’s dollar and the Korean won have surged around 10-12% as capital flows shift from U.S. assets. China’s yuan, however, has only modestly appreciated, drawing attention in Washington. Argentina’s peso remains a notable weak performer due to domestic reforms, while Mexico’s peso has rebounded. The British pound, up 9%, has seen renewed investment interest but faces macroeconomic headwinds, limiting its potential. Overall, the dollar’s rapid decline is reshaping global currency markets and influencing central bank strategies and trade dynamics worldwide.

Fund Managers Turn to Currency Trading Amid Dollar Volatility

A 7% decline in the U.S. dollar, driven by the policies and uncertainties of President Donald Trump’s second term, has transformed global fund managers into de facto currency traders. Once shielded from forex risks thanks to a strong dollar and a tech-driven U.S. market surge, investors now face mounting currency volatility. Analysts note limited hedging, particularly by Eurozone pension funds holding substantial unhedged dollar assets, making portfolios vulnerable to further declines. While U.S. stocks have rebounded in dollar terms since an April tariff shock, European investors have seen declines due to currency conversion. Meanwhile, European stocks have outperformed, especially when calculated in dollars. With currency-specific risk rising—as much as 30% of total risk for euro-based investors—fund managers are grappling with how to safeguard portfolios amid ongoing dollar depreciation. Although a sudden dollar drop might boost U.S. exports and asset appeal, the current gradual weakness undermines confidence in a return to American exceptionalism, prompting investors to consider diversifying away from the U.S.

Debate Over ‘De-Dollarization’ Intensifies

Despite heightened concerns about “de-dollarization” during President Trump’s second term, substantial evidence of a global retreat from the U.S. dollar remains lacking. Some major investors anticipate further declines in the dollar’s exchange rate, not due to a collapse in demand for U.S. assets, but as a function of adjusting to temporary market conditions. European Central Bank President Christine Lagarde noted unusual market reactions, including simultaneous drops in the dollar, U.S. Treasuries, and stocks, suggesting nervousness about U.S. economic policy.

Contrary to de-dollarization fears, Bank of America strategist Ralph Axel highlights that global “dollarization” has intensified over the past decade. U.S. federal debt quadrupled to $36 trillion, bank deposits doubled since 2008, and shadow banking (NBFI) assets surged to about $63 trillion. These rising liabilities indicate ongoing demand for dollar-denominated assets. However, recent moves by institutional investors, particularly in Europe and Australia, to hedge currency risk may put downward pressure on the dollar.

The article concludes that falling exchange rates may reflect a temporary adjustment rather than a structural shift away from the dollar. Analysts caution against conflating dollar weakness with de-dollarization and argue the exchange rate may serve as a necessary market-clearing mechanism.

Euro’s Market Share Stagnant Despite Dollar’s Decline

An ECB report reveals that the U.S. dollar continued to lose global market share in 2024, dropping 2 percentage points in foreign exchange holdings, now accounting for 58%. However, the euro has not emerged as a clear beneficiary, with its share hovering just below 20%. Instead, currencies like the Japanese yen and Canadian dollar, along with gold, have experienced gains. Central banks increased their gold reserves by over 1,000 tonnes last year—a record pace—driven by diversification and geopolitical risk concerns. Interestingly, gold now accounts for 20% of total global reserves, surpassing the euro’s 16%. Despite ECB President Christine Lagarde advocating for the euro to become the dollar’s alternative, the eurozone’s fragmented debt market, banking system, lack of a unified capital market, and limited geopolitical influence hinder its progress. Recent shifts in April show weakening of the dollar despite rising U.S. yields and increased issuance of euro-denominated bonds, suggesting some potential for the euro. Nonetheless, economists emphasize that without structural integration and the creation of large-scale, safe euro-denominated assets, the euro cannot significantly challenge the dollar’s dominance.

Asian Currencies Strengthen Amid U.S.-China Trade Uncertainty

A Reuters poll conducted on June 12, 2025, showed a significant rise in bullish positions on most Asian currencies amid ongoing uncertainty surrounding the U.S.-China trade agreement, which put pressure on the U.S. dollar. Notably, the Taiwanese dollar reached its strongest bullish sentiment since December 2020, and the South Korean won marked its highest bullishness in nearly two and a half years. Positive sentiment also increased for the Chinese yuan, which hit its highest level since October. Despite a framework agreement that included tariff adjustments, lifting of Chinese export restrictions on rare earths, and access for Chinese students to U.S. universities, markets were left uncertain due to a lack of implementation specifics. The dollar index has already fallen over 9% this year and is projected to decline further. South Korea’s currency strengthened following the election of President Lee Jae-myung, backed by promises of economic stimulus. Taiwan’s dollar has gained 10% this year, partly fueled by speculative trade benefits with the U.S. Conversely, sentiment weakened slightly for the Singapore dollar and Philippine peso, while views on the Indian rupee turned mildly bearish after an unexpected central bank rate cut. The poll reflects market positioning across nine major Asian currencies.

Conclusion

The global currency markets are experiencing significant shifts as the U.S. dollar continues its decline amid changing trade policies and economic uncertainties. While some currencies have strengthened in response, the overall landscape remains complex and fluid. Investors and policymakers alike must navigate these changes carefully, considering both short-term fluctuations and long-term implications for global trade and economic stability.

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