On January 28, dragged down by a strong rebound of the Japanese Yen, the U.S. Dollar Index fell to its lowest level in nearly four years, further intensifying the downward pressure on this major global reserve currency.
Ahead of the U.S. trading session on Tuesday, the Japanese Yen surged briefly after Japan's Finance Minister Shunichi Suzuki reiterated a coordinated stance with the United States, causing the Dollar Index to accelerate its decline with an intraday drop widening to 0.6%, hitting a new low since March 2022. The Dollar Index has now declined for four consecutive trading sessions, having just experienced its worst week since last April.
The weakening dollar reflects investor caution towards the U.S. government's recent capricious policy-making. In the long term, risks such as doubts over the Federal Reserve's independence, persistently expanding fiscal deficits, market concerns about government fiscal profligacy, and intensifying U.S. political polarization are all weighing on the dollar.
This renewed decline in the dollar also stems from signals from the U.S. supporting the weak Yen, leading markets to once again speculate that the U.S. and Japan might jointly conduct coordinated intervention in the foreign exchange market to guide the dollar lower against major trading partners' currencies. Last Friday, traders revealed that the New York Federal Reserve had contacted multiple financial institutions to check Yen exchange rates, a common preliminary step before market intervention.
The dollar's weakness has also boosted the Euro's performance, with the EUR/USD exchange rate rising above the 1.19 level, reaching its highest point since 2021; the GBP/USD exchange rate gained over 0.6%, touching its highest level since last July.
Dollar traders are currently paying the highest cost on record to hedge against the risk of a further sharp decline in the dollar. The premium for short-term dollar put options has expanded to its highest level since Bloomberg began compiling this data in 2011.
Simultaneously, massive trading volumes also highlight the market's growing pessimistic sentiment towards the dollar's outlook. On Monday, the dollar trading volume at the Depository Trust & Clearing Corporation reached the second-highest level in history, only lower than the level seen during the dollar's sharp decline on April 3, 2025.
The latest U.S. economic data indicates robust economic performance, leading traders to anticipate that the Federal Reserve will keep interest rates unchanged at its policy meeting on Wednesday. Despite this, the imminent finalization of the new Fed Chair nominee by former President Trump is also impacting the dollar, as markets speculate the new chair may be more inclined to lower borrowing costs.
The market expects that the Fed may implement two 25-basis-point interest rate cuts during the remainder of the year, which stands in sharp contrast to the policy expectations for most other major central banks—their rates are expected to remain on hold, or even potentially see hikes.
Furthermore, the risk of a U.S. government shutdown is also adding pressure on the dollar: Democrats have vowed to否决 the spending bill in Congress unless Republicans withdraw funding support for the Department of Homeland Security.
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