1. U.S. policy uncertainty has led to a wave of flight from the U.S. dollar and Treasury bonds, with the dollar index weakening more than 9% this year and analysts expect the decline to continue.

2. The depreciation of the greenback has caused other currencies to appreciate against it, especially safe-haven currencies like the Japanese yen, Swiss franc, and euro.

3. Nick Rees, head of macro research at Monex Europe, said that currency devaluation may be more considered by emerging markets, especially in Asia.

4. Wael Makarem, senior financial market strategist at Exness, said: “Emerging markets are facing high inflation, debt, and capital flight risks, making devaluation dangerous.”


The dollar has depreciated, and the spillover effect to other currencies has given a sense of both relief and headache to central banks worldwide.

Uncertainty about U.S. policy has led to a flight from the U.S. dollar and Treasury bonds in recent weeks, with the dollar index weakening more than 9% this year. Market watchers expect further declines.

According to the latest global fund manager survey from Bank of America, as many as 61% of participants expect the dollar's value to decline in the next 12 months — the most pessimistic outlook from major investors in nearly 20 years.

The flight from U.S. assets may reflect a broader crisis of confidence, with potential spillover effects such as higher import inflation as the dollar weakens.

Most central banks would be pleased to see the U.S. dollar drop 10%-20%.




The depreciation of the greenback has caused other currencies to appreciate against it, especially safe-haven currencies like the Japanese yen, Swiss franc, and euro.

According to LSEG data, since the beginning of the year, the Japanese yen has appreciated more than 10% against the U.S. dollar, while the Swiss franc and euro have appreciated about 11%.

Besides safe havens, other currencies that have appreciated against the dollar this year include the Mexican peso, up 5.5% against the dollar, and the Canadian dollar, which has appreciated more than 4%. The Polish zloty has risen more than 9% while the Russian ruble has appreciated more than 22% against the U.S. dollar.

However, some emerging market currencies have depreciated even as the greenback weakened.

The Vietnamese dong and Indonesian rupiah fell to record lows against the U.S. dollar earlier this month. The Turkish lira also reached a record low last week. The Chinese yuan hit a record low against the dollar nearly two weeks ago but has appreciated since then.

Is there enough time to cut interest rates?

Analysts told CNBC that, with the exception of a few outliers like the Swiss National Bank, a weaker U.S. dollar is welcome news for governments and central banks around the world.

“Most central banks would be pleased to see the U.S. dollar drop 10%-20%,” said Adam Button, chief currency analyst at ForexLive. He added that the strength of the dollar has been a persistent issue for many years and has made it difficult for countries with hard and soft dollar pegs.

With many emerging market countries having large dollar-denominated debts, a weaker dollar will reduce the actual debt burden. Additionally, a weaker greenback and a stronger local currency tend to make imports relatively cheaper, reducing inflation and therefore allowing central banks to cut interest rates to boost growth.

Button said the recent sell-off of the U.S. dollar creates more “room” for central banks to cut interest rates.



Mr. Thomas Rupf, co-director of Singapore and Asia investment director at VP Bank, said that while a stronger local currency can help curb inflation through cheaper imports, it complicates export competitiveness, especially in the context of the U.S. imposing new tariffs on Asian goods, which are considered the largest goods producers in the world.

Nick Rees, head of macro research at Monex Europe, said that currency devaluation may be more considered by emerging markets, especially in Asia.

However, these emerging markets and Asian central banks will need to be cautious to avoid capital flight and other risks.

Wael Makarem, senior financial market strategist at Exness, said: “Emerging markets are facing high inflation, debt, and capital flight risks, making devaluation dangerous.”

Additionally, he added that the U.S. administration may view currency devaluation as a trade measure that could lead to retaliatory action.

Alex Muscatelli, chief economist at Fitch Ratings, said that emerging market economies may be reluctant to cut interest rates as this could affect the debt burden of households and domestic firms that have borrowed in U.S. dollars. He added that a weaker local currency could also lead to capital outflows due to lower interest rate differentials with the U.S.

For example, Muscatelli does not see the Indonesian central bank cutting rates too much given the recent currency volatility, but he believes South Korea and India may cut rates.

Currently, it seems that the prioritized action is to avoid a currency war that would only add instability to the domestic and global economy.



The European Central Bank took the opportunity provided by lower inflation to cut interest rates by another 25 basis points at the April meeting. The ECB stated on Thursday that “Most measures of core inflation indicate that inflation will stabilize at the medium-term target of 2% set by the Governing Council on a sustainable basis.”

Another example is the Swiss National Bank, which has struggled with a strong franc for most of the past 15 years, Button commented. Exports of goods and services account for more than 75% of Switzerland's GDP, and the strong franc makes Swiss goods more expensive abroad.

“If capital continues to flow in, they may have to take drastic measures to devalue,” he said. Investors flock to the franc in times of turmoil, such as in recent weeks, causing the franc to strengthen.

Central banks are avoiding devaluation — for now.

Currency devaluation risks increasing prices, and monetary authorities will be vigilant about inflation exceeding their targets.

International economist and foreign exchange strategist at Wells Fargo, Brendan McKenna, said the risk of higher inflation arising from currency depreciation as well as tariffs — as countries respond to U.S. tariffs — could make central banks reluctant to pursue a path of voluntary devaluation.

Additionally, according to this strategist, while in theory most foreign central banks have the ability to weaken their currencies, this ability remains low in the current context.

Whether a country can devalue its currency depends on several factors: the size of foreign exchange reserves, the level of exposure to foreign debt, the trade balance, and the sensitivity to import inflation.



McKenna said: “Export-oriented countries with sufficient reserves and less dependence on foreign debt will have more room to devalue – but even these countries may act cautiously.”

The broader trade negotiation direction will be key to how countries choose to act. Besides China, several countries have shown goodwill to engage in trade negotiations, and if these negotiations lead to lower tariffs, then central banks are unlikely to pursue weaker currencies, he added.

Rupf of VP Bank said that in the current geopolitical context, currency devaluation could also lead to retaliation and the risk of being accused of currency manipulation.

Although there is still a possibility that trade tensions could lead to more protectionist outcomes, this would push central banks to devalue their currencies.

“But for now, it seems that the prioritized action is to avoid a currency war that would only add instability to the local and global economy,” McKenna said.


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