Economy Insights – Analysis
The second term of U.S. President Donald Trump is significantly influencing global currencies, albeit not in the anticipated manner. This year, the dollar has depreciated against all major currencies except the Canadian dollar, fueled by concerns that ongoing uncertainties surrounding tariffs could adversely affect the U.S. economy.
“Typically, tariffs bolster the dollar,” remarks Leveris Farmakis, a foreign exchange strategy analyst at Barclays Bank. “However, when it comes to close trading partners, this can undermine investor confidence in the American economy,” he added.
With the threat of economic stagnation rising in the United States, investors are increasingly inclined to acquire currencies like the euro, Swedish krona, and Japanese yen, all of which demonstrate robust performance amid global market fluctuations.
The primary movements observed in the currency market are as follows:
1- Significant Surge for the Euro
The German government’s commitment to boost spending on defense and infrastructure has propelled the euro to substantial heights. Last week, it experienced its largest weekly gain against the dollar since 2009 and is projected to achieve its strongest quarterly performance since 2022, reflecting an increase of 5 percent.
With the euro valued at $1.09, it has reached its highest level since the U.S. elections held on November 5. Analysts at Bank of America anticipate that the euro could rise to $1.15 by the end of 2025, with gains also noted against the British pound and Swiss franc.
“The European Central Bank is nearing the end of its monetary easing cycle, coupled with increased defense expenditures, effectively altering the euro’s long-term outlook, although U.S. tariffs remain a potential risk to its increases,” explains Kenneth Brooks, head of Foreign Currency Research and Interest Rates at Societe Generale.
2- The Steadfast Yen
This year, the yen has recorded robust gains, appreciating approximately 6 percent against the dollar. Its strength is attributed to higher Japanese interest rates and an influx of investment flows seeking safe havens amid global uncertainties.
“If one is seeking to hedge against the risks inherent in a slowing U.S. economy, Japan presents a favorable option, especially considering the potential decline in U.S. Treasury bond returns,” Parkles from Barclays notes.
The yen’s trajectory is notably influenced by the disparity between borrowing costs in the U.S. and Japan. Substantial wage increases granted by Japanese companies to labor unions have also fortified the currency’s bullish trend.
This has raised expectations that the Bank of Japan may accelerate its interest rate adjustments, further enhancing the yen’s attractiveness after four consecutive years of decline. Consequently, market speculation about the yen’s continued ascent has intensified.
3- The Pressure on North American Neighbors
Though tensions on the Canadian and Mexican currencies have diminished, they have not dissipated entirely. Analysts at ING report that current trading levels reflect a 2 percent risk premium on the Canadian dollar, significantly lower than the peak risk premium observed in February, when the Canadian dollar fell to its lowest point in 22 years against the U.S. dollar.
The Mexican peso has rebounded, regaining 5 percent from its recent lows and trading around 20.10 pesos per dollar, returning to levels seen prior to the U.S. elections.
Trump’s suspension of 25 percent tariffs on a majority of goods from Canada and Mexico is a favorable development. However, the reintroduction of tariffs on steel and aluminum has triggered retaliatory measures from Canada, prompting speculation about a potential interest rate reduction by the Bank of Canada, which could contribute to ongoing volatility in the Canadian dollar.
4- The Surprising Resilience of the Chinese Yuan
Contrary to expectations of significant downward pressure on the yuan due to Trump’s policies—which previously led to a currency depreciation during the 2018-2019 trade war—the yuan has demonstrated resilience this year, trading at approximately 7.25 yuan per dollar despite facing numerous tariffs.
Bank of America attributes this stability in part to Chinese authorities refraining from manipulating the exchange rate, as several emerging Asian currencies have seen steeper increases than the yuan, thereby maintaining a competitive edge for Chinese exports.
The financial institution further indicates that China continues to experience a relative devaluation of the yuan against its key trading partners, even while it has achieved modest gains against the dollar.
5- Strong Performance of the Swedish Krona
Among the currencies that have demonstrated noteworthy strength against the dollar, the Swedish krona has seen significant appreciation, increasing by 9 percent to reach approximately 10 krona per dollar, marking its strongest performance since late 2023. It has also remained stable against the euro despite the latter’s gains.
This robust performance is attributed to various factors, including rises in European equity markets, optimism regarding a potential ceasefire between Russia and Ukraine, and improved economic outlooks within Sweden.
Additionally, the krona benefits from the notable growth in defense company stocks. According to Societe Generale, Sweden holds a significant position among European defense companies as a percentage of GDP, thereby enhancing the appeal of its currency.
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