- USD has fallen to a three-year low despite its safe haven status
- This is the result of both long-term foreign reserve trends, as well as recent US trade policies
- We believe this decline could abate in the short term, but USD weakness looks set to persist
Wayne Lau, Vice-President, Multi-asset Strategy
G7 disappointment
The G7 Summit this week was dominated by the resurgence of military conflict between Israel and Iran, and ended prematurely when President Trump announced his early departure.
But even before leaving, President Trump seemed to be in no mood to play ball. Ahead of the 9 July expiry of the tariffs pause, several leaders at the summit, including Japanese PM Ishida and European Commission President von der Leyen, tried but failed to strike trade deals with the US. Only UK PM Starmer was able to walk away with a deal to cut tariffs on car exports.
Dollar weakness
And in the background were simmering but largely unspoken concerns about the level of the USD. Forty years ago, the Plaza Accord was signed to support the devaluation of the dollar. Today, opposite forces are in play, and the USD is at a three-year low.
Viewed as a safe-haven currency, the USD traditionally benefits from crises. But having weakened by up to 10 percent against major currencies so far this year, there are no signs of a rush to buy the dollar, despite the worsening Middle East conflict.
Fig 1: USD vs major currencies
Source Bloomberg/UOBAM
A perfect storm
The reasons for this USD weakness are multiple and include both long term factors as well as ones that are more tactical in nature. Structurally, central banks have been gradually diversifying their foreign currency reserves, and as a result, the USD’s share of total reserves has declined from 70 to 57 percent over the last two decades1.
While this de-dollarisation is longstanding, more recent concerns over the US government’s debt situation have prompted central banks and investors to offload some of their US Treasury holdings, further depressing the dollar.
Asia is taking the lead
The vicious cycle seems especially evident among Asian economies. It has been suggested that these economies are rethinking their USD-tilts, not just as a way to reduce their FX risks, but as a tactic in their trade negotiations with the US. The pressure to diversify their trading relationships is a further incentive to diversify their currency reserves.
In any case, Asian economies have a tendency to benefit from a weaker USD and are unlikely to resist this trend. Stronger local currencies help to improve their balance of payment positions and reduce the foreign-debt burden. It can also encourage stronger capital inflows as Asian assets become more attractive. That said, any upside may be limited by the fact that Asian monetary policies remain on an accommodative path with rate cuts expected over the medium term.
The Trump factor
A further factor that could put a lid on the USD is President Trump himself. He has often expressed his wish to see a weaker dollar and some would argue that this stands at the heart of his administration’s economic policy.
In fact, his dissatisfaction with the G7 (ex US) - backed world economic order stems from his belief that it systematically leads to an overvalued dollar. To counter this, some members of his administration have mentioned a “Mar-a-Lago Accord” which, like the Plaza Accord, would be designed to depreciate the USD. Such an accord now seems unnecessary, although notably, President Trump’s main target - the Chinese Yuan (CNY) - has barely risen against the USD.
UOBAM’s view
The USD’s free-fall mode since the start of 2025, despite real rate differentials against the DXY basket moving sideways, suggests an unwinding of the US exceptionalism narrative. Haphazard US policies, especially on the trade front, has resulted in lower foreign demand for USD-denominated assets.
In our view, after the current decline, the dollar is fairly valued and current positioning points to a possible near-term consolidation. That said, for the rest of 2025, we believe the dollar could trade in a similar fashion to that of 2017, where the dollar was weak in a period of an uncertain political environment. As such, we would urge investors to resist catching a falling knife and instead, to diversify their currency holdings, particularly to Asian currencies.
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