US dollar hits two-month high as weak growth in Europe and Asia hit G10 currencies

The dollar climbed near a two-month high on Wednesday, according to Bloomberg, as currencies across Asia-Pacific and Europe got hammered by growing economic and political ￰0￱ Bloomberg Dollar Spot Index rose 0.2%, closing in on its strongest level since ￰1￱ funds in Asia have started buying more put options against the euro and yen, betting those currencies will fall even ￰2￱ bounce comes after the dollar hit a two-year low in ￰3￱ with growth fears outside the ￰4￱ up, the dollar is getting picked up as a safer ￰5￱ euro took a blow from chaos in France’s parliament, while the yen dropped over growing speculation that Japan’s next prime minister might slow down rate hikes and turn up fiscal spending ￰6￱ top of that, the New Zealand dollar collapsed to its lowest in six months after the country’s central bank cut rates deeper than expected and said more cuts could still ￰7￱ funds dump euro and yen as the dollar gains ground The sharp swing toward the dollar came with heavy moves from hedge funds, which dumped riskier currencies like the euro and ￰8￱ in Asia said those funds poured into bearish bets, with fresh rounds of option buying that paid off as both currencies ￰9￱ euro’s weakness was tied directly to the ongoing political mess in France, which has shaken investor confidence.

Meanwhile, Japan’s currency was dragged lower after talks intensified around a possible leadership change that could bring looser monetary policy and more ￰10￱ dollar also surged against the New Zealand ￰11￱ Wednesday, New Zealand’s Reserve Bank unexpectedly slashed interest rates more than forecast and openly flagged that more cuts are on the ￰12￱ hit the kiwi hard, pushing it down to levels not seen since ￰13￱ the ￰14￱ stuck in a government shutdown, traders focused more on global weakness than Washington ￰15￱ fear outside the ￰16￱ outweighed the dysfunction within it, and that has turned the dollar into the go-to safe ￰17￱ warns that rising uncertainty boosts dollar demand and FX risks The IMF said in its latest Global Financial Stability Report that nearly $10 trillion changes hands daily in the foreign exchange ￰18￱ warned that the entire market is becoming more fragile as nonbank financial institutions (NBFIs) play a bigger role in handling currency risk and sourcing foreign ￰19￱ IMF’s report made it clear: when global uncertainty jumps, investors run toward safety; and that’s usually the ￰20￱ report said, “Dollar purchases by ￰21￱ tend to increase by 24 percentage points following a sharp spike in financial uncertainty.” That’s exactly what happened at the start of the COVID-19 pandemic in March ￰22￱ found that this demand surge was mostly driven by NBFIs, whose trades help during calm periods but add fragility during market ￰23￱ fear grips the system, things get ￰24￱ bid-ask spreads widen, exchange rates swing hard, and costs rise for both hedging and foreign ￰25￱ IMF said this shows up clearly in the cross-currency basis, a financial measure that tracks the cost of swapping ￰26￱ wider that basis gets, the more pressure there is in the ￰27￱ pain is worse in emerging markets , where dollar liquidity is harder to come ￰28￱ hedging costs also drive up bond yields and make stocks ￰29￱ countries with big debt loads or banks with mismatched currency exposure, the stress can snowball into a broader ￰30￱ market panic doesn’t just come from economic ￰31￱ IMF flagged operational failures, like tech outages, cyberattacks, and settlement issues, as another major threat to FX market ￰32￱ short outages in trading platforms can wreck liquidity, while failed settlements raise ￰33￱ fix this mess, the IMF said central banks and regulators need to run more liquidity stress tests, fix data gaps, and prepare emergency frameworks for fast-moving ￰34￱ also pushed for better cybersecurity, backup systems, and settlement tools that prevent one side of a trade from ￰35￱ the final lines of its report, the IMF said, “Comprehensive surveillance, stronger safeguards, and modernized platforms can reduce risk, enhance efficiency, and better position foreign exchange markets to support global finance.” If you're reading this, you’re already ￰36￱ there with our newsletter .