Concerns over US fiscal position dampen the dollar

SPI Asset Management managing partner Stephen Innes said the dollar's recent weakness is tied to deeper issues in the US economy, and not just interest rate changes.

"The dollar's weakness has very little to do with interest rates. In fact, the relationship between the dollar and US Treasury yields, which used to be strong, has now broken down completely. Investors are losing trust in US policies and are worried about the country's growing debt," he told Bernama.

Innes pointed out that a major factor in the dollar's decline is the growing shift of Asia's investments away from US assets.

"Asia is starting to pull back its US$5 trillion to US$7 trillion investments in US Treasuries, signalling a strategic change in how Asia views US assets.

"Asia's confidence in US assets is fading, which is contributing to the pressure on the dollar," he said.

Innes indicated that US fiscal issues, including the impact of President Donald Trump's "Big Beautiful Bill," are likely to expand the US deficit.

"The tax cuts and increased spending under this policy are making the deficit worse, and that is negative for the dollar," he said.

He said that a key factor contributing to the dollar's decline is the shift in how investors view US assets.

"For example, when the new Taiwan dollar unexpectedly rose in value (compared to the greenback), it caused significant losses for Taiwanese insurers holding US assets. They lost US$620 million in April alone. This shows that when smaller currencies strengthen against the US dollar, it discourages investment in US assets, further weakening the dollar.

"Japan's Nippon Life, a long-time buyer of US Treasuries, is now looking for investment opportunities in Australia and Europe. As investors start to look elsewhere for better returns and stability, demand for US assets and the US dollar will decline.

"In this environment, it's no surprise that the dollar is starting to feel like a leaky lifeboat," Innes said.

With these ongoing shifts, Innes said global markets could see a change in the strength of different currencies and as Asia reduces its dependence on US assets, we may see currencies like the euro, yen and Australian dollar become stronger.

With the dollar facing ongoing challenges, Innes sees its downward trend continuing. Any signs of strength in the dollar will likely be short term. Until the US fixes its fiscal issues, the dollar's weakness will probably continue.

Global Currency Shift

Bank Muamalat Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said the weakening of the US dollar is largely driven by concerns over the US fiscal position and a growing global shift away from dependence on the greenback.

"Recent populist policies, including tax cuts, have raised doubts over Washington's ability to manage its mounting debt, which led Moody's Ratings to downgrade the US sovereign rating from Aaa to Aa1 on May 16, 2025.

"As deficits widen and debt increases, confidence in the US government's ability to repay is being questioned. This has contributed to growing talks of de-dollarisation," he told Bernama.

Mohd Afzanizam said the US dollar's share in global foreign exchange reserves has fallen from 71 per cent in the first quarter of 1991 to 58 per cent in the third quarter of 2024, reflecting a gradual but real shift.

"The use of local currencies in trade, supported by technology such as e-commerce and QR payments, could accelerate this trend.

"For Malaysia, the ringgit may gradually benefit from the weaker dollar, although fluctuations are to be expected," he said.

He said that from 2009 to 2023, the US dollar accounted for 82 per cent of Malaysia's trade settlements.

"But Bank Negara Malaysia (BNM) has introduced frameworks with Thailand and Indonesia, and a currency swap with China, to encourage local currency use," he said.

He added that while US interest rates remain a factor, the dollar's recent weakness points more towards fiscal challenges than monetary policy changes.

Mohd Afzanizam noted that BNM will continue to anchor its policy decisions on domestic inflation and growth prospects, though a softer US dollar may offer more flexibility going forward.

-- BERNAMA