FX Pulse quarterly update

Summary & conclusions

USD has weakened faster than expected. We think there may be some short-term consolidation but expect further USD weakness over 12-months. We think JPY will be the strongest major currency over the next year.

Recent developments

The central bank easing cycle continues, with around 25 central banks cutting interest rates during 2025 Q2 (according to CentralBankRates). Six of them were among our selection of the 10 most traded currencies. The Fed was a notable abstainer from the cutting trend.

That didn’t stop continued weakening of USD (as seen in Figure 2, it was the weakest of the currencies that we cover over the one and three-month periods to the end of June). Interestingly, though 3-month rates in most of our sample have fallen versus US rates since the start of 2025, 10-year yields in most countries have risen relative to the US (the obvious exception being Hong Kong, of which more later). We believe this could be due to fears of a weakening US economy, perhaps the result of uncertainty caused by tariffs and other policies. Having said that, the recently published employment data for June was surprisingly good, with payroll gains of 147k and a fall in unemployment to 4.1% (though many other labour market indicators point to weakness).

Among other currencies, the strongest in recent months have been EUR and CHF, followed by AUD, CAD and NZD. Over 12 months, JPY has been the strongest, with GBP also toward the top of the rankings.  

It is our guess that EUR has strengthened, despite 100 basis points (bps) of ECB rate cuts so far this year, because of optimism about future European growth (on the back of increased military spending and German infrastructure spending). Indeed, the German 10-year yield has risen by around 25 bps since the end of 2024, while that of the US has fallen by more than 30 bps. Swiss 10-year yields have also risen (by 15 bps) but we think the search for so-called “safe haven” assets could explain some of the strength in CHF.

JPY has failed to follow through on earlier strength. The BOJ did tighten in January, and Japan is the only country in our sample where both 3-month and 10-year rates have risen since the start of 2025. However, the expectation of another rate hike this year (as suggested by overnight index swaps at the time of the January tightening), has now largely evaporated, suggesting the BOJ will be on hold until early 2026.

Not surprisingly, HKD and CNY have been among the weaker currencies over recent months, due to the HKD peg to the US dollar and the 19% weighting of USD within the CNY basket. At the start of May, HKD was approaching the upper limit of its allowable range against USD but subsequent HKMA activity has driven money market rates lower, pushing HKD down to the lower end of its (narrow) range, requiring corrective action in the opposite direction.

Investment risks

The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.