The dollar fell the most since the tariff crisis in April last year! Traders see more depreciation

**Source**: Wall Street Insights

**By**: Zhao Ying

The unpredictability of U.S. policies—including Donald Trump’s threat to take over Greenland, the risk of pressuring the Federal Reserve, concerns over America’s fiscal outlook and debt burden, and political polarization—are eroding market sentiment and dampening investor interest in U.S. assets. The Bloomberg Dollar Spot Index has recorded its steepest four-day decline since last April. Options markets are pricing in further dollar weakness, with the premium on short-term contracts betting against the greenback surging to the highest level since Bloomberg began compiling the data in 2011.

The U.S. dollar is facing its worst sell-off in nearly four years, as traders wager on further depreciation. The Bloomberg Dollar Spot Index posted its sharpest four-day drop since the announcement of comprehensive tariffs last April, and the cost investors pay to hedge against deeper sell-offs has hit an all-time high.

The dollar’s decline has pushed other major currencies to multi-year highs. Both the euro and the British pound climbed to their strongest levels in around four and a half years. The Japanese yen rallied sharply after Japanese officials signaled possible intervention to support the currency, notching its best three-day gain since the global carry trade unwound in August last year.

This downward trend is driven by multiple factors. The unpredictability of U.S. policies—from Trump’s threat to take over Greenland, which shocked European allies, to the risk of pressuring the Fed, concerns over the fiscal outlook and debt burden, and political polarization—are sapping market sentiment. James Lord, Head of Emerging Market Currency Strategy at Morgan Stanley, stated, "Unconventional catalysts are driving dollar weakness," and policy uncertainty is denting investor appetite for U.S. assets.

The Bloomberg Dollar Index tumbled to its lowest level since March 2022 on Tuesday. Following its worst annual performance since 2017, the dollar extended its weakness in January this year.

### Rising Expectations of Yen Intervention

The yen’s surge has emerged as a key factor weighing on the dollar. According to traders who spoke on condition of anonymity last Friday, the Federal Reserve Bank of New York contacted financial institutions to inquire about yen exchange rates—a preliminary step typically taken before intervention—reigniting speculation about coordinated currency intervention.

George Catrambone, Head of Fixed Income at DWS Americas, noted that the Fed officials’ inquiry about the USD/JPY exchange rate "put further downward pressure on the dollar". The yen rose to 152.43 against the dollar.

Japan’s Finance Minister Kotaro Kato confirmed after the G7 meeting on Tuesday that the government will closely coordinate with U.S. authorities to take appropriate action on exchange rate fluctuations if necessary. This statement reinforced market expectations of potential intervention.

### Major Currencies Strengthen Across the Board

The dollar’s weakness has provided broad support to global currencies. The euro touched $1.1990, its strongest level since 2021. The British pound rose 0.8% to $1.3791, also hitting a 2021 high. The Swiss franc jumped 1.4% to 0.7660 per dollar, reaching its strongest level since 2015.

The emerging market currency index rose for the fourth consecutive day, hitting an all-time high when including interest returns. Karl Schamotta, Chief Market Strategist at Corpay, pointed out, "Washington’s shift toward protectionism and diminished security commitments are prompting other countries to increase defense spending and sharpen their competitive focus, narrowing the growth and interest rate differentials that previously favored the dollar."

### Options Markets Bet on Further Dollar Decline

Options markets indicate that investor expectations of dollar depreciation are mounting. The premium on short-term contracts betting against the dollar has climbed to the highest level since Bloomberg started tracking the data in 2011. Bullish expectations for other currencies have also reached multi-month highs, approaching or matching the levels seen after the rollout of tariffs last April.

Mark Cranfield, Bloomberg Strategist, said, "The massive trading volume in G-10 currency options this week supports the view that the dollar depreciation theme is gaining traction among investors. Whether the Fed’s exchange rate inquiry is the start of the so-called 'Mar-a-Lago Accord' or not, macro traders are independently concluding that the dollar is in a downward trajectory."

Trading volumes have been exceptionally robust. The volume processed through the Depository Trust & Clearing Corporation on Monday hit the second-highest level on record, trailing only April 3, 2025.

### Policy Risks Continue to Simmer

Although U.S. economic data points to solid performance, and traders expect the Federal Reserve to keep interest rates unchanged on Wednesday, markets still anticipate nearly two 25-basis-point rate cuts this year. This stands in contrast to expectations that many other major central banks will hold rates steady or even raise them.

Trump’s pending choice for the next Federal Reserve Chair is also weighing on the dollar, with markets speculating that the new chief may be more inclined to lower borrowing costs. The risk of another federal government shutdown is also brewing, as Democrats have vowed to block congressional spending bills unless Republicans strip funding for the Department of Homeland Security.

Mitul Kotecha and Lhamsuren Sharavdemberel, analysts at Barclays, wrote on Tuesday, "We see the risk premium on the dollar accumulating again," noting the dollar’s poor performance following Trump’s Greenland threat.

Win Thin, Chief Economist at Bank of Nassau, said, "The dollar sell-off momentum this week has been fierce, indicating that there is still room for further dollar decline."

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