Dollar slump puts pressure on global central banks: devalue their currencies or stay strong?

The dollar is tanking, and it’s forcing every central bank on Earth to make a choice they hate. Either devalue their own currencies to keep exports alive, or let their money get stronger and watch their economies choke on lower demand.

That’s the setup right now. The situation has been building for weeks, and it’s getting worse. The US government is all over the place under Trump’s second term, and nobody trusts what’s coming next.

Investors have started dumping the dollar and US Treasurys, and the numbers show just how bad it’s gotten. The dollar index has fallen more than 9% this year. The latest Global Fund Manager Survey from Bank of America shows that 61% of managers expect the dollar to lose more value over the next 12 months.

That’s the worst sentiment these managers have had about the dollar in nearly two decades.

Safe currencies surge as the dollar bleeds

The greenback’s collapse has pushed other currencies higher, especially the so-called safe ones. The Japanese yen is up by more than 10% against the dollar this year while the Swiss franc and euro are each up by over 11%, according to data from LSEG at press time.

These surges sound nice, yes, but they’re actually a problem. A strong currency makes exports more expensive, and for countries that rely on selling stuff abroad, that’s a problem they don’t need right now.

The Mexican peso has surged by 5.5%, the Canadian dollar is up by over 4%, the Polish zloty climbed by more than 9%, and the Russian ruble jumped by a huge 22% against the dollar this year, LSEG’s data shows.

But not all currencies are rising. Some are crashing hard. The Vietnamese dong and Indonesian rupiah dropped to their lowest ever levels against the dollar this month. The Turkish lira also hit a fresh record low last week. Even China’s yuan, which dipped to a new low two weeks ago, has only barely bounced back.

Adam Button, who works as chief currency analyst at ForexLive, said the weakness of the dollar is something central banks have been waiting for. “Most central banks would be happy to see 10%-20% declines in the US dollar,” he said.

Button pointed out that dollar strength has been a pain in the ass for years, especially for countries that either peg to the dollar or have big dollar-denominated debts. When the dollar is weak, it lowers their repayment costs. It also helps kill off imported inflation, since a stronger local currency means cheaper imports. That gives central banks space to cut rates and try to get their economies moving again.

Central banks hesitate as inflation, capital flight risks grow

But that’s just the upside. Button said the other side of the coin is the problem with exports. A strong local currency makes a country’s goods more expensive in global markets. That’s especially bad in Asia, which handles most of the world’s manufacturing.

This is why countries like Indonesia are unlikely to slash rates anytime soon. Their currency is already too unstable. But places like India or South Korea might still have some space to cut. The problem is that once rates drop, investors might move their money into US assets chasing better yields, which triggers capital outflows.

Switzerland is in a league of its own. Button pointed out that 75% of Swiss GDP comes from exports, and a strong franc has been a nightmare for the last 15 years. During global panic, investors always run to the franc, pushing it even higher. If this keeps up, Button said Switzerland might have no choice but to devalue.

Some countries are using the window of falling inflation. The European Central Bank dropped rates by 25 basis points at its April meeting. They said inflation is falling toward their 2% goal, so they’ve got room.

Cryptopolitan Academy: Tired of market swings? Learn how DeFi can help you build steady passive income. Register Now