Currency Markets in 2025: A Trader’s Perspective

Introduction

The first quarter of 2025 turned out to be turbulent for the global economy. The return of Donald Trump to the presidency of the United States marked a new wave of trade conflicts, increasing market volatility. Investors were faced with “America First” in practice: trade tariffs, geopolitical tensions, and recession fears set the tone for the start of the year. In such an environment, currency markets came into the spotlight, as exchange rate fluctuations directly impact trade flows, inflation, and financial stability around the world. Currencies play a crucial role in the global economy: the US dollar dominates international transactions for commodities and goods, and sharp movements in its value can exacerbate financial stress across the international system.
In this article, as a trader, I will share my analysis of the key trends in the foreign exchange markets in Q1 2025, my personal view on the risks and outlook, and what I believe lies ahead for investors and policymakers.

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Key Trends in the Currency Markets in Q1 2025

2.1. US Dollar Dynamics: Trump Tariffs, Fed’s Response, and Dollar’s Share in Reserves

The US dollar began 2025 with a sharp reversal downward. While markets initially feared a surge in inflation from Trump’s protectionist agenda in January, by the end of March the focus had shifted to recession fears. The Dollar Index (DXY) dropped by approximately 4% over the quarter — the worst Q1 performance for the dollar since the 2008 global financial crisis.
The weakness in the dollar was driven by the “tariff rollercoaster” introduced by the Trump administration and the retaliatory measures from trade partners. The President announced a new set of tariffs — the so-called “Liberation Day” plan — threatening to raise the average tariff on global goods from 2.5% to 10% or higher.
Such aggressive trade policy undermined investor confidence in the US currency and increased demand for safe-haven assets like gold, which soared by 17% — its best quarterly gain since 1986.

The Federal Reserve responded cautiously, trying not to add to the market turbulence. In March, the Fed kept its benchmark rate unchanged at 4.25–4.50%. Senior officials, including New York Fed President John Williams, emphasized that the current stance is “moderately restrictive” and continues to help contain inflation.
However, they also acknowledged heightened risks: tariffs could push up prices on the one hand and hurt the economy and labor market on the other. Thomas Barkin from the Richmond Fed admitted being “nervous on both fronts,” urging a wait-and-see approach.
Amid heightened uncertainty, the Fed signaled readiness to cut rates later in the year if trade wars visibly drag the economy down.
From my perspective, this cautious strategy helped maintain a minimal level of trust in the dollar, preventing panic from fully taking over the market.

Interestingly, despite the decline in the exchange rate, the dollar’s share in global reserves remains dominant — though gradually declining. According to IMF data, by the end of 2024, the dollar accounted for about 57.8% of official currency reserves — near a historical low.
Even Trump, a self-declared strong dollar advocate, warned BRICS countries against creating an alternative to the greenback, calling it “mighty” and irreplaceable.
Thus, the US currency had a tough quarter — on the one hand pressured by trade factors and expectations of Fed easing, and on the other hand supported by persistent liquidity and its global reserve status.

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2.2. Euro Position: German Stimulus, Rising Defense Spending, and ECB Policy

For the euro, the first three months of 2025 were a period of cautious strengthening, driven by changes in Europe’s economic policy.
Germany — long known for its fiscal discipline — made a historic policy shift. In March, a new coalition agreement was formed that allowed for loosening strict debt rules to enable investments.
The coalition agreed to exempt defense spending from the “debt brake” and establish a special €500 billion fund for infrastructure development.
This effectively means a significant increase in government spending: the defense budget, which had exceeded 1% of GDP, was no longer capped and could reach the NATO goal of 2% of GDP.
For instance, the plan includes accelerating procurement for the Bundeswehr and prioritizing infrastructure projects — a stimulus of this scale is expected to add up to +0.8% to Germany’s GDP in 2025.
In my opinion, these measures were a breath of fresh air for the eurozone economy and a signal to investors that Europe is ready to spend in the name of growth.

It’s no surprise that European markets reacted positively. The yield on 10-year German Bunds jumped by 40 basis points during the quarter — the largest increase since 2023 — reflecting expectations of economic acceleration and increased borrowing.
European equity markets outperformed the US, with shares of EU defense companies rallying strongly on the back of rising military budgets and geopolitical tensions.
Against this backdrop, the euro appreciated by approximately 4% against the dollar (from around $1.04 at the start of the year to $1.08 by the end of March).
Although European exporters faced headwinds from US tariffs, they were partly cushioned by the redirection of trade flows: China, facing American duties, increased its exports to the EU, softening the price shock.
Additionally, reduced energy imports and gradually declining gas prices helped ease inflationary pressures across the eurozone.

The European Central Bank (ECB) acted no less cautiously than the Fed in Q1. Inflation in the eurozone was easing: forecasts suggested that by April, the headline CPI would decline to ~2.1%, and core inflation to 2.3% — close to the ECB’s target.
This gave the ECB room not to tighten policy further. Moreover, given the risks from trade wars and early-year banking turbulence, the ECB hinted at the possibility of mild easing later in the year.
According to some estimates, the market priced in around a 50% chance of a deposit rate cut by April–June.
Still, ECB President Christine Lagarde made it clear that external shocks like Trump’s tariffs were a net negative for the global economy, and much would depend on their duration and scale.
In my view, the ECB adopted a wait-and-see stance — ready to support the economy if conditions worsen, but not in a rush to ease without necessity.
As a result, the euro strengthened at a moderate pace in Q1, supported by improved fiscal outlooks in the EU and relative monetary stability.

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2.3. Emerging Market Currencies: Yuan and Rupee Strengthen, Capital Flows Into Asia

Most currencies appreciated against the US dollar in early 2025 — especially in Europe and among several emerging markets. Only a few laggards, such as the Turkish lira, recorded declines (data: LSEG, Reuters).

The weakening of the dollar opened a window of opportunity for emerging market (EM) currencies, and many of them seized the moment.
In Asia, key currencies strengthened: since February, the Chinese yuan gained around +2.4%, while the Indian rupee rose by approximately +2.3% against the dollar.
Although the full-quarter gains were more modest (yuan +0.5%, rupee roughly flat), the shift in sentiment was evident.
Investors once again turned to Asian markets, not only due to the dollar’s weakness but also thanks to regional economic successes.
China and India continued to post solid growth, and market participants began betting that their currencies could strengthen further, boosting investment returns.
The logic is simple: if a currency is expected to appreciate, investments in its home market become more attractive — currency revaluation adds to returns.
Historically, when EM currencies rise, foreign capital tends to flow into these markets — and Q1 2025 was no exception.

Indeed, we witnessed a clear inflow of portfolio investments into Asia.
According to exchange data, since the beginning of the year, foreigners increased their holdings in Asian EM equities, halting the prolonged capital outflows that had persisted since mid-2024.
Interest was particularly strong in Indian and South Korean stock markets, where foreign fund sales in previous months had reached extreme levels and seemingly exhausted themselves.
Now, with a more stable rupee and encouraging corporate earnings, the investment climate has improved.
The Chinese yuan strengthened despite US tariff pressure — likely supported by expectations of future stimulus from Beijing and relatively attractive Chinese bond yields.
The Indian rupee was buoyed by sustained capital inflows into Indian assets, compensating for the country’s modest trade deficit.
Export-oriented currencies also stood out: the Brazilian real (+7.5% vs. the dollar for the quarter) and the Mexican peso (+2.5%) managed to post gains thanks to high commodity prices and strong investment flows.

Still, the dynamics were uneven. Amid overall optimism, some underperformed.
The Turkish lira continued to depreciate (-6–7% in Q1) due to unstable economic policy and political risks.
The Argentine peso weakened by nearly 4% amid an inflation crisis at home.
Indonesia’s rupiah lost around 2–3% on concerns over fiscal sustainability and growing influence of the military.
These cases reminded investors that a weaker dollar alone doesn’t solve domestic issues — deficits and political instability still weigh heavily.
All in all, as a trader, I felt a long-lost “tailwind” returning to EM currencies: the dollar’s retreat and rising risk appetite gave long-overdue relief to emerging markets after several difficult years.

Risk of the US Dollar Losing Its Reserve Currency Status

3.1. Decline in Dollar Share to 57.8% and the Rise of Other Currencies

A fundamental question hanging over the currency market is whether the global privileges of the US dollar will be preserved. In the first quarter of 2025, concerns over the potential loss of the dollar’s status as the primary global reserve currency were once again actively debated.
Statistics indeed confirm a gradual “erosion” of the dollar’s share in central bank reserves worldwide. According to IMF (COFER) data, the nominal share of the dollar in official reserves fell to a record low of 57.3% in Q3 2024, before slightly rebounding to 57.8% by the end of the year.
For comparison: in the early 2000s, this share exceeded 70%.
This slow decline in the dollar’s reserve dominance has been ongoing for years and accelerated after the pandemic. However, it’s important to understand the context behind these numbers.
In Q4 2024, the dollar strengthened significantly against most currencies (by 7.6% on an index basis). As a result, the dollar’s share in reserves increased mathematically—because other reserve currencies like the euro, yen, and pound depreciated in dollar terms.
But when adjusted for exchange rate effects, the real share of the dollar actually continued to fall—to around 54.1%. In other words, central banks are steadily reducing their dollar holdings and diversifying their currency portfolios.

Where are the reserves flowing, once they leave the dollar?
Interestingly, not so much into the euro as into so-called “non-traditional” currencies.
The euro has consistently held about ~20% of global reserves for many years and has not meaningfully gained ground against the dollar.
However, the combined share of second-tier currencies—such as the Australian and Canadian dollars, the Swedish and Norwegian krona, the South Korean won, and the Chinese yuan—has grown steadily.
Together, these alternative currencies accounted for 12.6% of global reserves by the end of 2024, compared to less than 3% before 2009.
This shift reflects the desire of reserve managers to diversify risks.
In an environment where financial and political ties with the US are becoming less predictable, central banks prefer not to put all their eggs in one basket.
Nonetheless, the dollar still attracts more reserve managers than any other currency. Even with a declining share, it remains larger than all other currencies combined.
As analysts point out, “the erosion of dollar dominance does not mean the loss of its leadership.”
I agree—this is an evolutionary process: the dollar’s share may gradually decline, but its full dethronement as the #1 reserve currency is still far off.

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3.2. Liquidity and Trust as Pillars of Dollar Dominance

Why, despite all threats, has the dollar not lost its ground quickly?
The answer lies in systemic advantages that have formed over decades.
First and foremost—liquidity. The market for dollar-denominated assets is the deepest and most liquid in the world.
US Treasury bonds are viewed by investors as a safe haven and can absorb trillions of dollars without sharp price movements. In times of crisis, global institutions flee to the dollar and Treasuries, ensuring constant demand.
No other currency currently has a comparable pool of reliable financial instruments.

Second—trust and habit.
The dollar has served as the global settlement and reserve currency since the Bretton Woods era, and countries have accumulated vast holdings in it over decades.
For central banks, reserves are a rainy-day insurance fund, and thus are managed conservatively.
Reserve managers value stability and predictability more than short-term returns.
As experts note, they are not prone to sudden moves and diversify only gradually.
Neither the euro nor the yuan has yet convinced the world they can fully replace the dollar in terms of reliability, transparency, and the status of universal trust.

These factors act as anchors preventing the dollar from losing credibility.
Even in Q1 2025, when political rhetoric put the dollar under pressure, the architecture of the global system remained unchanged.
Most international trade contracts are still denominated in dollars—from oil to food.
The interbank payment system (SWIFT) and trade financing are still dollar-centered.
As a result, demand for dollar financing remains high.

For many emerging markets, the dollar remains the benchmark: their national currencies are often volatile, and holding reserves in them is risky.
Even the Chinese yuan, despite its rising international role, still accounts for only ~2–3% of reserves—partly due to China’s capital controls and limited convertibility.
I’m convinced that as long as the US maintains relative macroeconomic stability and deep capital markets, momentum will favor the dollar.
The world may gradually reduce its dollar dependency, but in times of shock, all roads still lead back to the American currency.

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3.3. De-dollarization Efforts (BRICS and Others): Limited Success and Key Obstacles

In recent years, many countries have spoken openly about de-dollarization—reducing their reliance on the dollar.
In the first quarter of 2025, the topic gained new momentum due to the efforts of alliances like BRICS and other emerging economies.
At the January summit, representatives from Brazil, Russia, India, China, and South Africa once again discussed expanding transactions in national currencies—and even floated the idea of a common trading currency.
However, the actual progress of these initiatives has been modest at best.
Attempts to displace the dollar face a number of fundamental obstacles.

First, the alternatives to the dollar are flawed.
You can’t create a new reserve currency “overnight”—it requires a long history of stability, a deep bond market, free capital movement, and investor trust.
The Chinese yuan, a frequent candidate, remains tightly controlled by Beijing, with foreign holders exposed to regulatory restrictions.
The euro, while freely traded, suffers from unresolved structural issues within the EU and lacks a unified fiscal center.
Gold has made a partial comeback (central banks in developing nations have increased gold purchases as a hedge), but gold lacks the flexibility and utility of a modern currency.
Ultimately, none of the contenders can yet offer what the dollar does: a combination of liquidity, stability, and universal recognition.

Second, political interests diverge.
The BRICS countries are not fully aligned in their monetary policies.
China and India are competitors in Asia, with different currency regimes and economic models.
Brazil and South Africa rely heavily on commodity markets priced in dollars.
Efforts to agree on joint measures are often thwarted by national priorities.
Even if BRICS were to create a hypothetical “pooled currency” for mutual settlements, its rollout would be slow and limited.
Many remember how much political integration was required to form the eurozone.
BRICS has no supranational central bank or budget, casting doubt on the viability of any shared monetary initiative.

Third, the US response matters.
Washington closely monitors these developments.
Notably, Donald Trump explicitly warned BRICS nations in January not to challenge the dollar.
The US holds considerable global influence—both financial and diplomatic—and can impose obstacles, from sanctions to trade barriers, against those actively promoting dollar alternatives.
In a world where the US remains the largest economy and military power, an open challenge to the dollar entails serious costs.

For all these reasons, large-scale de-dollarization is proceeding slowly.
Yes, some countries are conducting more transactions in their own currencies (e.g., India paying more for oil in rupees, China using yuan for commodity deals).
Some Russia-China deals now settle in rubles/yuan, bypassing the dollar.
But the global financial system remains firmly anchored to the greenback.
The US share of global GDP is gradually shrinking, but the dollar’s supremacy is supported not just by economics—but by decades of inertia.
This past quarter has only confirmed the duality of the situation: there is much talk about change, but little practical movement.
I see de-dollarization as a long road full of bumps and detours—and no sharp turns have occurred just yet.

The Impact of Investment Factors on Exchange Rates

4.1. Trade Flows and Their Influence on Currencies

Exchange rates are shaped by a multitude of factors, but one of the most fundamental drivers is trade flows between countries.
Exports and imports directly impact the supply and demand for a national currency.
If a country consistently sells more goods abroad than it imports (a positive trade balance), foreign partners must acquire that country’s currency to pay for exports—creating upward demand and, typically, long-term appreciation of the currency.
Germany and Japan are classic examples: for decades, their strong export sectors supported the long-term strength of the Deutsche Mark (and later the euro) and the yen, until offset by other variables.

Conversely, a trade deficit (imports exceeding exports) implies a steady outflow of currency abroad, increasing its supply on global markets and exerting downward pressure on its value.
The US has historically run a persistent trade deficit, and this is one structural factor contributing to the long-term softening of the dollar—although offset by its status as the world’s reserve currency, which attracts significant capital inflows.

Price effects also matter.
If a currency weakens significantly, imported goods become more expensive, reducing demand for them, while exports become more competitive abroad.
Thus, the exchange rate influences the trade balance, and an equilibrium effect emerges.
In Q1 2025, US trade barriers and the resulting decline in the dollar made American goods somewhat cheaper abroad, while imports became more expensive domestically.
In theory, this should have narrowed the US trade deficit and supported the dollar.

However, trade wars distort these mechanisms.
Tariffs and sanctions create price distortions: even with a weaker dollar, foreign goods may remain uncompetitive in the US market due to levies.
In response, other countries redirect their exports—as we saw, China partly offset its loss of the US market by increasing exports to Europe.
Meanwhile, US exporters lost access to some traditional markets due to retaliation—for example, American agricultural products faced new trade barriers.

As a result, global trade flows in Q1 2025 were turbulent.
While global trade volumes rose slowly, their directions shifted.
Currencies responded accordingly: for instance, the Mexican peso and Canadian dollar, although hit by US tariffs, ended the quarter stronger against the dollar thanks to realignment of trade relationships.
Their resilience can be explained by investor confidence that the core export industries of Mexico and Canada—such as oil and automotive—will ultimately find buyers, and current frictions are temporary.

A country’s currency may heavily depend on the nature of its exports.
Commodity-linked currencies—like the Canadian and Australian dollars, Russian ruble, and Brazilian real—tend to strengthen when global prices for oil, metals, and agricultural products rise.
In our quarter, oil prices were volatile, but gold and copper saw significant gains.
This supported currencies like the Australian dollar (a major metal exporter) and the South African rand (gold).
Conversely, when a country’s main export declines in value, its currency often weakens due to shrinking export revenues.

In addition to prices, trade policy plays a role.
The emergence of major trade agreements—or, on the contrary, trade barriers—affect currency valuation.
Recall the 2020 USMCA deal (US–Mexico–Canada), which reduced uncertainty and boosted the peso and Canadian dollar.
In Q1 2025, the opposite occurred: growing protectionism weighed on currencies.
Nevertheless, I believe trade structure acts as an anchor.
Currencies of countries with steady global demand for their exports—such as advanced technology or scarce resources—tend to depreciate less in times of crisis and recover faster.
This foundation may explain the relative stability of the Japanese yen (Japan remains a net global creditor and continues exporting high-tech goods) or the recent strength of the Swedish krona (+10.7% against the dollar in early 2025, driven by high exports of raw materials and equipment).

In the end, trade flows act as a “slow force” that shapes long-term currency trends, while financial flows may rattle them in the short run.

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4.2. Investment Flows: Interest Rates, Asset Yields, and Country Examples

The second major engine of currency markets is capital investment flows.
Capital seeks higher returns with acceptable risk, and these flows often move exchange rates faster than trade.
Central bank interest rates are one of the key benchmarks for investors.
If a country’s rates rise relative to others, its currency typically appreciates—because higher interest rates make financial assets like bonds more attractive.
Global investors—from hedge funds to pension funds—begin reallocating portfolios toward such assets, seeking better returns.
To do so, they need to buy the local currency, boosting its exchange rate.

This is the logic behind carry trade strategies—borrowing cheaply in low-rate currencies (like the yen) and investing in high-yielding ones (like the Brazilian real), profiting from interest rate differentials.
Of course, there’s always the risk of sudden exchange rate reversals.
But as long as interest differentials are wide and volatility is moderate, the strategy remains viable.

In Q1 2025, we saw how divergent monetary policies impacted currencies.
While the Fed paused rate hikes, some emerging market central banks cautiously started cutting rates, as inflation cooled faster in their economies.
For example, Brazil had high interest rates through 2024 and began easing—this slightly tempered the previously strong real, although it remained firm due to commodity inflows.

Japan, by contrast, surprised markets by signaling an exit from ultra-loose policy: the yield on 10-year Japanese government bonds spiked to the highest levels since 2008.
This fueled speculation that the Bank of Japan might raise rates, and helped strengthen the yen (~+4% against the dollar for the quarter).
Likewise, expectations of higher rates or bond yields in Europe (driven by German fiscal stimulus) led to inflows into the euro and European assets.

On the other hand, if investors believe rates are headed down, a currency may weaken as investment appeal fades.
That was the case in the US during the latter half of the quarter, when markets started pricing in Fed rate cuts due to rising recession risks—adding further pressure on the dollar.

Besides rates, returns on other assets—stocks, real estate, FDI—also matter.
In Q1 2025, we saw a rotation out of US markets into Asia.
US equities, especially tech stocks, suffered major losses (Nasdaq fell), while the MSCI Asia ex-Japan index rose ~1.5%.
This triggered capital shifts toward Asia, where investors anticipated better returns.
As money flowed into Asian assets, regional currencies found support.
For instance, the South Korean won and Indian rupee strengthened in part due to heavy foreign buying of domestic equities.
Example: foreign funds aggressively purchased Indian IT and financial sector stocks, betting on earnings recovery—simultaneously boosting the rupee.

In such cases, a currency becomes a barometer of investor confidence: when capital flows in, the currency rises; when capital exits (as seen in Russia post-2022 sanctions), the currency depreciates regardless of trade balances.

Another example—interest rate differentials and capital flows:
In 2022–2023, when the dollar surged sharply, many emerging markets experienced capital flight and currency weakening because US rates spiked and “pulled” money from riskier regions.
Now the situation has reversed: US rates have stabilized or are expected to decline, and investor appetite for EM assets has returned.

The Mexican peso, which struggled a year ago amid Fed tightening, regained strength—investors recognized that Mexico offers high returns (Banxico rate ~11%) with relatively low volatility, and re-entered its bond market, lifting the peso.
China and India’s interest policies remain stable, but their real rates (adjusted for inflation) are now higher than in the US, attracting bond inflows.

Of course, any inflow can quickly turn into an outflow if global risk sentiment changes.
But the lesson from Q1 is clear: investment flows can outweigh trade dynamics in the short term.
The dollar fell faster in Q1 2025 than trade balances shifted, precisely because financial markets re-evaluated interest rate paths and recession risks.
As a result, we saw a vivid example of how the combination of rate differentials and return expectations can drive significant currency moves—even in the absence of major trade shifts.

Possibility of a New Currency Agreement

5.1. The Plaza Accord of 1985: Goals, Outcomes, and Lessons

Whenever global coordination of currency policy is mentioned, the Plaza Accord of 1985 inevitably comes to mind. This agreement among the world’s largest economies—namely the US, Japan, Germany, France, and the UK—is a textbook example of successful joint intervention in foreign exchange markets.

The backdrop was the early 1980s, when the US dollar had appreciated sharply—by nearly 50% over five years—following aggressive rate hikes by the Fed under Paul Volcker. By 1985, the dollar had become a “super-currency,” damaging US export competitiveness and inflating import prices for America’s trade partners. The US had accumulated a significant trade deficit, and the Reagan administration faced pressure from industry to restore competitiveness.

The solution was found in multilateral coordination: in September 1985, at New York’s Plaza Hotel, the finance ministers and central bank governors of the G5 agreed to weaken the dollar through coordinated market intervention. The aim of the Plaza Accord was to reduce the dollar’s value relative to key currencies—particularly the German mark and Japanese yen—by selling dollars and buying other currencies.

The results were dramatic. The dollar reversed course and fell more than 50% against the yen and mark over the next two years. The yen, for example, appreciated from ~240 to ~120 per dollar by 1987. The US trade deficit began to narrow, and exports gained support. However, the rapid depreciation of the dollar raised new concerns, prompting the 1987 Louvre Accord (G5 + Canada), aimed at stabilizing exchange rates and halting the dollar’s further decline.

The lessons of Plaza 1985 are multifaceted. On one hand, it proved that international coordination can significantly influence FX trends. When major central banks act in unison, markets have limited power against their collective will. On the other hand, Plaza also demonstrated the side effects: the sharp rise of the yen hurt Japan’s economy and export sector. To offset the drag on domestic demand, Japanese authorities slashed rates, fueling asset bubbles in real estate and equities. These later burst, plunging Japan into its infamous “lost decade.”

Some analysts—especially in China—blame Plaza for these imbalances, arguing that artificially strengthening the currency undermined competitiveness. Thus, Plaza remains both a model of success and a cautionary tale: interventions must be cautious, coordinated, and mindful of long-term consequences.

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5.2. Modern Initiatives and the Views of Key Economies

Today, the idea of a new global currency agreement occasionally resurfaces, especially when exchange rates cause geopolitical tension. In Q1 2025, the concept of a hypothetical “Plaza 2.0” gained some traction amid President Trump’s unprecedented trade moves. Trump openly expressed his desire for a weaker dollar to improve the trade balance, but achieving that unilaterally is extremely difficult due to the complex consequences of protectionist policy.

Some even fantasized about a “Mar-a-Lago Accord”—a theoretical deal between Trump and Xi Jinping where China would agree to substantially appreciate the yuan. But most analysts agree that such a scenario is highly unlikely. China has no interest in repeating Japan’s post-Plaza experience and would resist undermining its export competitiveness to appease US demands. Meanwhile, Washington—despite its frustration with a strong dollar—also hesitates to take steps that might stoke inflation or scare off investors from dollar-denominated assets.

Beyond the US and China, Europe and Japan remain skeptical. The European Central Bank adheres to a policy of “non-targeting” the euro—it doesn’t set exchange rate goals or intervene unless volatility threatens financial stability. Instead of direct involvement, the EU prefers indirect measures, like enhancing the international role of the euro through bond markets or exploring a digital euro.

Japan, while historically active in FX intervention, usually acts unilaterally to protect the yen during sharp declines (as in 2022). Participating in a new Plaza-like agreement would risk yen appreciation—undesirable given Japan’s chronically low inflation.

Informally, exchange rate imbalances are discussed within the G7 and G20. In the 2010s, verbal commitments to avoid “competitive devaluations” helped prevent full-blown currency wars. In 2025, the context is different: the dollar has already weakened via market forces, easing pressure. Meanwhile, Trump’s aggressive tariffs have irritated US partners, who respond with retaliatory duties—not FX manipulations.

In my view, global coordination akin to 1985 is only feasible in moments of systemic danger—when all major economies agree that floating rates are damaging everyone. Right now, such consensus is absent. China is building regional alternatives (e.g., yuan settlements, gold reserves) rather than signing grand accords. Europe is preoccupied with internal stability. Emerging markets may want a fairer system but lack influence to shape it.

Some regional initiatives deserve mention—like the Chiang Mai Initiative (ASEAN+3) with currency swap lines in national currencies to reduce dollar dependency. But that’s insurance, not a global pact.

No major central bank—Fed, ECB, or BoJ—currently signals readiness for exchange-rate-focused coordination. Even Trump, despite his rhetoric, hasn’t formally proposed a new international pact—likely understanding the diplomatic complexities involved.

Thus, “Plaza 2.0” remains theory. Markets in Q1 2025 were driven more by real policy (tariffs, rates) than by speculation on global deals. But if volatility escalates, we cannot rule out that history may repeat—rivals often unite when economic threats outweigh differences.

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Conclusion

Q1 2025 marked a period of significant shifts in the currency markets, revealing key risks and opportunities. The quarter’s core themes:

• The Trump administration reignited trade wars, weakening the dollar and fueling talk of de-dollarization—though the dollar’s reserve status endures due to its unmatched liquidity and global trust.

• The euro strengthened, supported by rare alignment between fiscal and monetary policy in Europe—Germany opened the fiscal floodgates, and the ECB kept inflation under control.

• Emerging market currencies caught a long-overdue break—capital flowed back into Asia, lifting many EM currencies. But vulnerabilities remain (e.g., lira, peso), reminding us that internal fundamentals still matter.

The risks haven’t vanished. The primary risk is a US recession—if tariffs and uncertainty severely slow the economy, the Fed may be forced to ease rapidly, weakening the dollar further. Paradoxically, a crisis phase could see the dollar strengthen as a safe haven—just like in 2008.

For the euro, the risk is that external shocks—new energy crises or regional unrest—might expose structural weaknesses in the eurozone. Germany’s fiscal steps offer hope, but southern European debt issues haven’t disappeared. A delicate balance between stimulus and stability is needed.

EM currencies have benefited from the current environment, but they remain sensitive to global trends. A reversal in risk appetite or another dollar surge could quickly pressure them again.

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The Dollar’s Reserve Future: My View

Despite constant headlines about the “decline of the dollar,” I believe it will retain its central role for the foreseeable future.
Yes, its share in global reserves is falling gradually, and de-dollarization is trending. But as we discussed, no viable alternative exists. The euro, yuan, and others either lack scale or the will to assume that burden.

In Q1 2025, the dollar was tested by trade war dynamics—and it lost value—but not status. In the coming years, I foresee a more multi-currency world, where settlement in other units grows to 20–30%. But the “throne” stays with the dollar, unless the US commits serious policy errors.

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Recommendations

Central Bank Watch:
Upcoming decisions by the Fed and ECB are crucial. Investors should track central bank statements on rates and liquidity—any changes immediately affect FX. Key question: will the Fed start cutting in response to a slowdown?

Also monitor EM central banks like the PBoC and RBI—their measures to stabilize currencies or boost economies will impact the yuan, rupee, and others.

Geopolitics & Currencies:
Geopolitical shifts will continue to stir FX markets. Watch for trade talks, sanctions, or regional elections. Politically sensitive currencies like the ruble, lira, and rand require extra caution.

Global Trade Trends:
Trade flows are evolving. Follow data on balances, supply chain shifts, and new trade deals. More BRICS settlements in national currencies or alternative payment systems could steadily affect reserve demand.

Commodity prices (oil, food, metals) will directly influence exporters’ currencies—tracking those trends can help forecast FX movements (e.g., CAD, AUD, RUB, BRL).

Investor Sentiment & Market Positioning:
FX is linked to broader markets. Continue monitoring global capital flows—will investor rotation into Asia persist? Will hedge funds return to long dollar positions if stability returns?

Risk indicators (VIX, FX volatility indexes) and CFTC data on speculative positioning will signal market sentiment. In Q1, large players reversed dollar bets sharply—don’t miss their next move.

Global Financial Architecture:
Track discussions on reforming the global currency system—digital central bank currencies (CBDCs), greater IMF SDR usage, and regional blocks gaining influence. Even verbal coordination at G20 or BRICS forums can swing markets short-term.

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First-person analytical article by a professional trader on global currency markets in Q1 2025. Covers the state of the world economy, USD and EUR dynamics, emerging market currencies (yuan, rupee), risks to the dollar’s reserve status, effects of trade and investment flows, historical perspective from the Plaza Accord, and modern monetary initiatives. Includes expert forecasts and actionable recommendations for investors and policymakers.