IMF Reports Sharp Weakening of US Dollar Since April

The International Monetary Fund (IMF) has reported a notable depreciation of the US dollar since April 2025, attributing the shift to a combination of market sentiment, structural adjustments, and changing perceptions about the currency’s traditional role as a global hedge.

In its latest assessment, the IMF noted that while the weakening of the dollar has sparked speculation among investors about long-term shifts away from U.S. financial assets, current cross-border capital flow data does not confirm a broad-based exit from dollar-denominated securities.

“Some investors believe the decline reflects deeper structural changes, such as diversification away from U.S. assets,” the Fund stated. “However, available data does not yet support the view that there is a widespread pullback from U.S. securities.”

A growing number of investors have also been hedging more aggressively against a further fall in the dollar. This move, the IMF explained, has been influenced by concerns that the dollar’s historical role as a risk-hedging asset may be diminishing.

While this shift in hedging strategies has played a role in the currency’s decline, the IMF cautioned that it remains too early to tell whether these changes represent a lasting transformation in global investor behavior or a temporary response to current market dynamics.

Simultaneously, many emerging market currencies have appreciated in recent months, a development fueled in part by renewed capital inflows. These inflows are being driven by expectations that certain emerging market central banks now have greater flexibility to reduce interest rates, thanks to more stable macroeconomic conditions.

The Fund’s update further highlighted that overall global financial conditions have become increasingly supportive since its April Global Financial Stability Report. The rebound has returned conditions to levels considered historically accommodative.

Equity markets have soared, with valuations reaching elevated levels once again. Corporate bond spreads have narrowed to their lowest point so far this year, and volatility in financial markets has continued to decline—even as concerns about trade and geopolitical uncertainties persist.

However, the IMF warned that the current calm may be short-lived. A resurgence of tariff hikes or the conclusion of temporary trade truces could rapidly sour market sentiment.

“If existing tariff pauses expire and trade tensions escalate, risk appetite could deteriorate quickly, leading to another sharp selloff in global risk assets,” the report stated.

On the monetary policy front, expectations have shifted considerably since April. Interest rate projections in advanced economies have become more moderate and vary widely, reflecting different stages in their economic cycles and the uneven pace of disinflation.

According to market pricing, the European Central Bank (ECB), after having already implemented several rate cuts, is expected to reduce rates once more before halting its easing program. Meanwhile, the U.S. Federal Reserve and the Bank of England are anticipated to cut rates twice more this year, following pauses to assess incoming economic data.

Japan remains an exception. Market expectations suggest only a limited probability of another rate hike by the Bank of Japan in 2025, signaling a more cautious stance.

Sovereign bond markets in advanced economies have also experienced shifts. Yield curves have steepened, driven by rising government borrowing, reduced demand for long-term bonds by institutional investors, and the effects of quantitative tightening. These factors have pushed long-term interest rates higher in several developed markets.

Conversely, yields on local currency bonds in emerging markets have generally trended downward, supported by the weaker dollar. This decline has allowed emerging market economies to consider easing their monetary policies without triggering capital flight or exchange rate instability.

Despite some pressure on yields in developed markets, the broader financial environment remains favorable for many developing countries, creating space for policy adjustments and fiscal management.

The IMF concluded by emphasizing that while financial conditions currently appear stable, the global outlook remains vulnerable to sudden shifts in trade policy, monetary tightening, and investor sentiment, all of which could rapidly reshape market dynamics.