Global Currency Markets React to U.S. Trade Policies and Economic Uncertainties

Global Currency Markets React to U.S. Trade Policies and Economic Uncertainties

As of June 10, 2025, global currency markets are experiencing significant volatility, primarily influenced by the United States’ trade policies and economic uncertainties. The U.S. dollar has notably underperformed, while other currencies are reacting to shifting investor sentiments and geopolitical developments.

U.S. Dollar Under Pressure

The U.S. dollar has declined approximately 10% against a basket of major currencies in 2025. This downturn is largely attributed to increased hedging activities by foreign investors in response to escalating economic and political uncertainties stemming from President Donald Trump’s policies. Traditionally viewed as a safe haven, the dollar’s inverse relationship with risk assets has weakened, prompting foreign pension and insurance funds to raise their currency hedge ratios. For instance, Danish funds increased their hedge ratios on U.S. assets from 65% to 75% within two months. Similar trends are observed in Canada, the eurozone, and Scandinavia. With foreign investors holding about $33 trillion in U.S. securities, even minor increases in hedge ratios generate substantial currency market flows. Analysts suggest this trend may continue as long as economic volatility persists, indicating prolonged pressure on the dollar. Dollar floored as investors seek that extra hedge

Hong Kong Dollar Faces Volatility

Erratic policy decisions by President Trump have also triggered volatility in the Hong Kong dollar, affecting a currency peg that has been a financial cornerstone for over 40 years. Although the peg remains intact, recent fluctuations have led to significant changes in interest rates, posing new challenges for businesses and investors. The Hong Kong dollar recently surged to the strong end of its 7.75–7.85 range against the U.S. dollar, prompting four interventions by the Hong Kong Monetary Authority (HKMA) in May. This influx of capital into Hong Kong, driven by strong share offerings and increased Chinese investments, has decoupled local interest rates from those in the U.S., leading to record-low borrowing costs. Analysts caution that an abrupt narrowing of interest rate gaps could shock the financial system. Nevertheless, Hong Kong officials affirm the peg’s resilience and highlight advantages of lower interest rates, such as bolstering the housing market and enabling the government to issue long-term debt at favorable terms. When pegs fly: Trump-induced turbulence hits Hong Kong dollar, interest rates

Indian Rupee Shows Mild Bearish Bias

The Indian rupee is expected to face slight downward pressure due to a firm U.S. dollar, with attention focused on ongoing U.S.-China trade talks in London. The one-month non-deliverable forward suggests the rupee will open in the 85.63-85.66 range versus 85.62 in the previous session. The dollar index has gained 0.24%, and most Asian currencies have weakened slightly. A Mumbai-based trader noted that the rupee remains in a narrow range and a 20-paisa movement is likely at most, with a mild bearish tendency. Despite the Reserve Bank of India’s recent unexpected 50-basis-point rate cut, its impact on the rupee has been negligible. Market participants are closely watching the continuing trade discussions between U.S. and Chinese officials, amid lingering uncertainties regarding U.S. trade policy and the legal status of certain tariffs. On the economic front, Brent crude is up 0.5% at $67.4 per barrel, 10-year U.S. Treasury yields stand at 4.49%, and foreign investors have shown positive sentiment, purchasing a net $147.5 million in Indian equities and $85.8 million in bonds on June 6, according to NSDL data. Mild bearish bias for rupee on dollar strength; US-China talks eyed

U.S. Refrains from Labeling China as Currency Manipulator

In a newly released semi-annual Treasury report to Congress, the U.S. refrained from designating China as a currency manipulator but strongly criticized the lack of transparency in China’s exchange rate policies. This decision arrives amid ongoing efforts by the Trump administration to negotiate a trade agreement with China and avoid a full-scale trade war. While the U.S. Treasury left the door open to a possible future finding of manipulation, current evidence did not meet the threshold. Treasury Secretary Scott Bessent emphasized that the U.S. will not tolerate macroeconomic policies that contribute to unfair trade imbalances and pledged to apply countermeasures against currency manipulation if needed. President Trump reported a “very positive” call with Chinese President Xi Jinping, during which both leaders agreed to resume trade talks. In a move to foster negotiations, Trump temporarily reduced tariffs on Chinese goods from 145% to 30% for 90 days, while China lowered its tariffs on U.S. products from 125% to 10%. These developments come amidst volatility in global markets and concerns over the impact of the U.S.-China trade dispute on international commerce. US declines to label China a currency manipulator, but blasts its transparency policies

Trade War Challenges for Emerging Markets

Gita Gopinath, the IMF’s first deputy managing director, has highlighted that the current U.S. trade war, initiated under President Donald Trump, poses a greater challenge to emerging market economies than the COVID-19 pandemic did. Unlike the synchronized easing of monetary policies during the pandemic, the trade war introduces uneven economic impacts and inflationary risks, complicating central banks’ responses. Tariffs and shifting policy directions have increased uncertainty, leading to potential capital outflows, currency depreciation, and higher financing costs in emerging markets. Despite recent rebounds in currencies and equity markets due to investor sentiment toward monetary easing, volatility remains high. Gopinath also noted the growing risk posed by crypto and stablecoins, which could disrupt traditional financial systems and undermine currency stability. While emerging markets have strengthened institutions and adopted inflation-targeting regimes, their economies remain highly vulnerable to global financial shifts. The OECD supports these concerns, warning that economic prospects and investor sentiment could precipitate disruptive capital movements. Overall, the unpredictable nature of trade policies and broader global economic conditions poses substantial risks for emerging markets’ monetary stability. Trade war a bigger challenge for emerging market central banks than Covid, says IMF’s Gita Gopinath

In summary, global currency markets are navigating a complex landscape shaped by U.S. trade policies, economic uncertainties, and geopolitical developments. Investors and policymakers alike are closely monitoring these dynamics to make informed decisions in an increasingly volatile environment.