Dollar Under Pressure: Policy Uncertainty Increases Exchange Rate Volatility
So far in 2025, the dollar has been on a steady decline, driven by multiple adverse factors. The Dollar Index has fallen more than 10% this year, with an accelerated breakdown in the second quarter, signaling widespread market concerns about the U.S. macroeconomic policy direction.
The downward momentum of the dollar mainly stems from three factors. Firstly, the economic deterioration triggered by tariff policies. Unlike the U.S.-China trade tensions in 2018, there is now a clear inverse relationship between the Dollar Index and trade policy uncertainty. The euro, yen, and Swiss franc, as safe-haven currencies, have benefited and risen, becoming primary tools for risk avoidance.
Exchange Rate Clause Concerns: Trade Negotiations Affect Currency Markets
The second factor is market concern about the contents of the "Mar-a-Lago Agreement." Although the U.S. Treasury has repeatedly stressed an unchanged strong dollar policy, the Trump administration's focus on reducing deficits during trade negotiations leads the market to speculate that exchange rate clauses may become a key negotiating point. This is particularly concerning for some Asian economies, which have large dollar holdings and limited hedging capacity, making them vulnerable to position liquidations or increased hedging demands if exchange rate expectations change, further pushing their currencies higher against the dollar.
Double Threat to U.S. Bonds and the Dollar: Fiscal Policy as a Constraint
The third factor is U.S. fiscal risk. Since April, the positive correlation between the Dollar Index and U.S. Treasury yields has gradually weakened, reflecting market concerns over not just changes in risk-free rates but also liquidity and even credit risk implications. Amid resetting debt ceilings and expanding government bonds, both the dollar and U.S. bonds may continue to be under "double threat."
It is expected that in the third quarter, the increasing issuance of U.S. bonds will impact global liquidity, further pressuring the dollar.
Euro's Safe-Haven Value Evident, Currency Structure Revaluation
The euro has shown strength beyond its fundamentals, mainly due to its safe-haven characteristics amid policy and market turbulence. Although Europe's economic recovery is weak and the European Central Bank maintains a relatively loose monetary stance, policy stability and asset scale support have made the euro a crucial choice for investors reallocating their assets.
Analysts point out that in this currency fluctuation, the euro has successfully "decoupled" from interest rate logic, thanks largely to its safe-haven appeal. Against a backdrop of frequent U.S. policy risks, the euro is expected to continue demonstrating a dual role as a "safe-haven currency and stable anchor."
Asian Currencies Hold Potential for Excess Rebound, Renminbi Remains Steady
Unlike before, the renminbi has exhibited unexpected resilience against high U.S. tariffs. In the first half of the year, the renminbi appreciated slightly against the dollar while depreciating against a basket of currencies, reflecting the combined effect of a weak dollar and external disruptions.
Considering that China's policy still emphasizes maintaining stability and flexibility in exchange rates, the renminbi is expected to maintain low volatility in the second half, continuing to serve as a stabilizer. Meanwhile, other Asian economies, by accumulating a substantial amount of dollar-denominated foreign assets, may experience an opportunity for excessive appreciation.
