The US dollar posts its biggest drop since the tariff turmoil last April! Traders expect further depreciation.

The US dollar is experiencing its most severe sell-off in nearly four years, as traders bet on further weakness. The Bloomberg Dollar Spot Index has posted its steepest four-day decline since last April’s announcement of comprehensive tariffs, and the cost investors pay to hedge against deeper sell-offs has hit an all-time high. The dollar’s decline has propelled other major currencies to multi-year highs. Both the euro and the pound have reached their strongest levels in around four and a half years, while the yen has surged sharply after Japanese officials hinted at possible intervention to support the currency, marking its best three-day rally since last August’s global carry trade crash. This downturn has been driven by multiple factors. The unpredictability of US policy—including Trump’s threat to take control of Greenland that shocked European allies, risks from Trump’s pressure on the Fed, concerns over US fiscal prospects and debt burdens, and political polarization—are all eroding market sentiment. James Lord, Morgan Stanley’s Head of Emerging Markets Currency Strategy, said, “Unconventional catalysts are driving dollar weakness,” and that policy uncertainty is dampening investor interest in US assets. The Bloomberg Dollar Index fell on Tuesday to its lowest level since March 2022, and after its worst annual performance since 2017, the dollar has maintained its weakness into January this year. Yen Intervention Expectations Rise The yen’s surge has become a key factor putting pressure on the dollar. According to traders last Friday, the New York Fed reached out to financial institutions to inquire about the yen’s exchange rate—an initial step typically taken before intervention, reigniting market speculation about coordinated currency intervention. George Catrambone, Head of Fixed Income at DWS Americas, noted that the Fed’s inquiries into the dollar-yen exchange rate “further depressed the dollar.” The yen climbed to 152.43. Japan’s Finance Minister, Katayama Satsuki, confirmed after the G7 meeting on Tuesday that the government will closely coordinate with US authorities and take appropriate measures on exchange rate volatility if necessary. This statement heightened market expectations for a potential intervention. Major Currencies Strengthen Across the Board The dollar’s weakness has broadly supported global currencies. The euro touched $1.1990, its strongest level since 2021. The pound rose 0.8% to $1.3791, also hitting a new high since 2021. The Swiss franc surged 1.4% to 0.7660 per dollar, its strongest since 2015. Emerging market currency indexes have risen for the fourth consecutive day, reaching an all-time high when interest returns are included. Karl Schamotta, Chief Market Strategist at Corpay, noted, “Washington’s turn toward protectionism and weakening security commitments are prompting other countries to increase defense spending and sharpen their competitiveness, narrowing the growth and interest rate differentials that previously favored the dollar.” Options Markets Bet on Further Dollar Decline Options markets show rising expectations for dollar depreciation. The premium for short-term contracts betting on a weaker dollar has reached its highest level since Bloomberg began tracking data in 2011. Bullish expectations for other currencies have also reached multi-month highs, comparable to levels seen last April following the tariff announcements. Bloomberg strategist Mark Cranfield said, “The huge volumes in G-10 currency options this week support the view that the dollar depreciation theme is gaining attention among investors. Whether or not the Fed’s rate inquiries herald the so-called ‘Mar-a-Lago Accord,’ macro traders are judging for themselves that the dollar is on a downward trajectory.” Trading volumes have been exceptionally active. Monday’s volume via the Depository Trust & Clearing Corporation was the second highest on record, trailing only April 3, 2025. Policy Risks Continue to Build Despite robust US economic data and traders expecting the Fed to keep rates unchanged on Wednesday, the market still anticipates nearly two rate cuts of 25 basis points each this year, contrasting with expectations among many other major central banks for rate holds or even hikes. Trump’s pending choice for the next Fed chair is also weighing on the dollar, with speculation that the new chair may favor lower borrowing costs. Another federal government shutdown risk is brewing, with Democrats vowing to block the congressional spending bill unless Republicans remove funding for the Department of Homeland Security. Barclays analysts Mitul Kotecha and Lhamsuren Sharavdemberel wrote Tuesday, “We see risk premium accumulating again in the dollar,” noting the dollar’s poor performance following Trump’s Greenland threat. Win Thin, Chief Economist at Bank of Nassau, said: “This week’s ongoing dollar sell-off is intense, signalling there is still room for further decline.” Risk Warning and Disclaimer Markets are risky and investment must be cautious. This article does not constitute personal investment advice and has not taken into account the specific investment objectives, financial situation, or needs of any individual user. Readers should consider whether any opinions, views, or conclusions in this article suit their particular circumstances. Investments made based on this article are at your own risk.