The U.S. dollar is heading toward its steepest weekly decline in twelve months, influenced by unsettled investor sentiment following President Trump's controversial remarks concerning Greenland. These developments have coincided with a period of shifting geopolitical tensions, including Trump's withdrawal of tariff threats against Europe and his abandonment of an aggressive stance on Greenland, opting instead for a negotiated access agreement with NATO partners.
Investor nerves triggered a pronounced downturn in dollar assets early in the week as the geopolitical situation evolved. The dollar index, which benchmarks the U.S. currency against a basket of six currencies, fell to 98.329 after recording a 0.58% drop in the previous session. This sets the stage for an approximate 1% weekly decline, marking the currency's most significant movement since January 2025.
At the same time, the euro held steady around $1.1751, maintaining levels near a nearly three-week peak achieved earlier in the week. The British pound also showed resilience, with rates near $1.3496, close to a two-week high reached in prior trading.
Thierry Wizman, a global foreign exchange and rates strategist at Macquarie Group, noted that while the Greenland agreement alleviates immediate tariff and territorial conflict concerns, it fails to address fundamental issues relating to alienation among allies. This situation poses challenges to sustaining the U.S. dollar's role as the world's primary reserve currency, according to Wizman.
Attention among investors now turns to the Bank of Japan's upcoming policy decision. The central bank is widely expected to maintain its current interest rate, which was raised to a three-decade high in the previous month. Market watchers are particularly focused on Governor Kazuo Ueda's statements for indications on the timing of subsequent rate hikes and any signs of a hawkish stance aimed at bolstering the weakened yen.
The yen has faced mounting pressures since Sanae Takaichi assumed the position of Japan's prime minister in October, declining by over 4% amid fiscal concerns. The currency hovered around 158.50 per dollar during early Asian trading sessions and is on track for its fourth consecutive weekly loss, a downturn not experienced since September. There is apprehension among traders that a fall below the 160 mark could prompt intervention from Tokyo to stabilize the currency.
Magdalene Teo, head of fixed income research for Asia at Julius Baer, remarked that the yen continues to be sold off due to lingering doubts about the Bank of Japan’s accommodative monetary stance amidst rising inflation risks. Durable appreciation of the yen would likely require robust domestic investment alongside confidence that Takaichi's administration will foster growth and fiscal stability, rather than precipitate economic collapse.
Recent data showed Japan's core consumer inflation decelerated through December but remained above the central bank's 2% target, sustaining market expectations for future interest rate hikes. Concurrently, a selloff in Japanese government bonds highlighted investor concerns over Japan's fiscal outlook following Takaichi's surprise election call and tax cut promises, leading to record-high bond yields.
Carol Lye, portfolio manager at Brandywine Global, emphasized the necessity for concrete fiscal measures. Without tangible actions, market volatility in Japanese government bonds is likely to persist, compounded by the gradual pace of interest rate increases.
Elsewhere in currency markets, the Australian dollar remained relatively flat at $0.6841, while the New Zealand dollar weakened by 0.25% to $0.5914. Bitcoin edged up by 0.37% to $89,518.13, recovering from a weekly low earlier in the session.