Global Currency Markets React to U.S. Trade Policies and Interest Rate Speculations

Global Currency Markets React to U.S. Trade Policies and Interest Rate Speculations

As of June 11, 2025, the global currency markets are experiencing significant fluctuations influenced by recent U.S. trade policies and speculations surrounding interest rate decisions.

U.S. Dollar’s Declining Market Share

According to a recent study by the European Central Bank (ECB), the U.S. dollar’s share in global foreign exchange reserves decreased by 2 percentage points in 2024, now accounting for 58%. Notably, the euro has not capitalized on this decline, maintaining a share just below 20%. Instead, currencies such as the Japanese yen and Canadian dollar, along with gold, have seen increased holdings. Central banks added over 1,000 tonnes of gold to their reserves last year, marking a record pace driven by diversification strategies and geopolitical risk concerns. Gold now represents 20% of total global reserves, surpassing the euro’s 16% share. Despite efforts by ECB President Christine Lagarde to position the euro as an alternative to the dollar, structural challenges within the eurozone hinder its progress. (reuters.com)

U.S. Treasury’s Stance on China’s Currency Practices

In its semi-annual report to Congress, the U.S. Treasury refrained from labeling China as a currency manipulator but criticized the nation’s lack of transparency in exchange rate policies. This decision comes amid ongoing trade negotiations between the two countries. Treasury Secretary Scott Bessent emphasized that the U.S. will not tolerate macroeconomic policies contributing to unfair trade imbalances and pledged to counteract currency manipulation if necessary. (apnews.com)

Hong Kong’s Currency Peg Under Scrutiny

Hong Kong’s overnight interest rates have remained just above zero over the past month, an unusual occurrence given the currency’s peg to the U.S. dollar. This situation has created low-risk arbitrage opportunities, allowing borrowing in Hong Kong at nearly 0% to invest in U.S. assets yielding over 4%. The persistence of this arbitrage indicates underlying stress in global markets. The Hong Kong Monetary Authority (HKMA) has intervened to maintain the currency peg, injecting liquidity to depress local rates. Despite these measures, concerns about the peg’s stability persist amid geopolitical tensions and market volatility. (ft.com)

Emerging Markets Face Challenges Amid Trade Wars

Gita Gopinath, the International Monetary Fund’s first deputy managing director, highlighted that the current U.S. trade war poses a greater challenge to emerging market economies than the COVID-19 pandemic did. 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. (ft.com)

Conclusion

The global currency markets are navigating a complex landscape shaped by U.S. trade policies, interest rate speculations, and geopolitical tensions. The decline in the U.S. dollar’s market share, challenges to currency pegs, and the impact on emerging markets underscore the need for vigilant monitoring and strategic responses from policymakers and investors alike.