Donald Trump’s second presidency is having a dramatic impact on currencies around the world, although not as much as investors predicted just a few months ago, on Friday, the 14th of March, writes Reuters.
The dollar has weakened against all other developed market currencies this year except the Canadian dollar amid concerns that tariff uncertainty is hurting the US economy.
“Overall, tariffs are generally favourable for the dollar,” said Lefteris Farmakis, FX strategist at Barclays. “But when applied to very close trading partners, they can damage trust in the US.”
US recession risks are rising and investors are also seeing reasons to buy the euro, Swedish crown and Japanese yen.
Euro
Germany’s plan to increase defence and infrastructure spending has contributed to the euro’s strength. Last week it gained the most against the dollar since 2009 and is expected to rise 5% this quarter, its best performance since 2022.
The euro is around 1.09 dollars, its highest level since the US elections on the 5th of November. The Bank of America forecasts further growth and it could reach 1.15 US dollars by the end of 2025.
The euro has also increased against the pound sterling and the Swiss franc.
The European Central Bank is nearing the end of its easing policy and higher defence spending in Europe has significantly changed the outlook for the euro, said Kenneth Broux of Societe Generale. However, he warned that US tariffs could still threaten the euro’s gains.
Japanese yen
Another big gainer is the Japanese yen. It has risen by 6% against the dollar this year, as interest rates are higher in Japan and investors seek safety in uncertain times.
“If you’re worried about a US economic slowdown, invest in Japan because US interest rates could fall,” said Barclay’s Farmakis.
The Japanese yen reacts strongly to the interest rate differential between the US and Japan. In Japan, companies are pledging to increase wages significantly, which could lead the central bank to raise interest rates more sharply.
This would make the yen stronger after four years of decline. Investors are betting more than ever that the yen will continue to rise.
Mexican peso and Canadian dollar
Pressure on the currencies of Canada and Mexico, the US’s two largest trading partners, has eased but is unlikely to disappear soon.
ING Group puts the Canadian dollar’s risk premium at 2%, half of what it was at the beginning of February when it hit a 22-year low against the US dollar.
The Mexican peso has recovered 5% from a three-year low reached last month and is now close to its level before the US election.
Trump suspended 25% tariffs on most goods from Canada and Mexico, which is good news. However, steel and aluminium tariffs were launched on Wednesday, triggering a Canadian response and raising the possibility that the Bank of Canada will cut interest rates again. Unsurprisingly, the Canadian dollar remains volatile.
Chinese yuan
Trump’s policies were expected to hit the Chinese yuan hard, with some predicting that Beijing would allow its currency to weaken, similar to the 2018-2019 trade war.
Although China faces higher tariffs than most other countries, the yuan has actually strengthened this year to around 7.25 yuan to the dollar.
The Bank of America pointed out that one of the reasons why the Chinese authorities have not encouraged a weaker exchange rate against the dollar is that other Asian emerging market currencies have strengthened more than the yuan, thus supporting Chinese exporters.
Successful Swedish crown
One currency that has risen sharply against the dollar and perhaps gone unnoticed is the Swedish crown.
It has strengthened by 9% to almost 10 crowns to the dollar, its most stable level since late 2023, and has even held its ground against a resurgent euro.
Analysts believe that the strong performance of European equities, hopes for a Ukraine-Russia ceasefire and an improving outlook for the Swedish economy explain the outperformance.
In addition to the sensitivity to European equities, the crown also benefited from the rise in defence sector shares. According to Societe Generale, Sweden has a large share of the European defence industry relative to its economy.
So far in 2025, the dollar is not among the best-performing currencies
