US dollar hits one-month low as G-7 sparks fresh FX policy watch

A gauge of the dollar fell to its lowest in a month as traders awaited a Group-of-Seven meeting this week for any signs the Trump administration is seeking a weaker US currency.

The Bloomberg Dollar Spot Index dropped 0.4% on Wednesday, its third straight decline. Options markets reflected the shift, with one-month sentiment turning the most bearish in five years, as concerns over the US budget deficit lingered.

The greenback extended earlier losses after South Korea’s finance ministry said that FX discussions with the US are ongoing, but nothing has been decided yet. Japanese Finance Minister Katsunobu Kato said last week he will seek an opportunity for currency talks with his US counterpart Scott Bessent this week.

“The broad dollar decline is counter-intuitive but suggests financial markets are losing confidence in US policies,” according to Elias Haddad, a currency strategist at Brown Brothers Harriman & Co. In a note to clients, he said that rising stagflation risks and Trump administration’s implicit support for a weaker currency are also weighing on the greenback. 

Washington is unlikely to “aggressively pursue” a weak dollar, but the greenback will end up declining as the nation reaches agreements with its trading partners to lower tariffs, Citigroup Inc. currency strategists led by Osamu Takashima wrote in a note.

Chris Turner, head of FX strategy at ING, said that the language used to describe currency policy at the G7 nations meeting is highly likely to remain unchanged, yet any tweaks “could prove incendiary and hit the dollar.”

The yen and the Swiss franc outperformed earlier after CNN reported that new US intelligence suggested Israel could be gearing up for a possible strike on Iran’s nuclear facilities. The dollar continued to fall against all Group-of-10 peers, a sign that it’s losing its haven status. 

Morgan Stanley raised its call on US stocks and Treasuries, yet sees the dollar continuing to weaken as the US’s economic growth premium relative to peers fades and the yield gap between it and other countries narrows.

Worries about the US budget deficit are also weighing on the dollar. Legislators are in discussions about a tax-cut package, with Republicans trying to keep revenue losses down to $4.5 trillion over 10 years. In its current form, the loss would be $3.8 trillion. This comes after Moody’s downgraded US debt last week, citing a failure to halt a trend of large fiscal deficits. 

“Rising fiscal concerns are fueling a combined rise in long-end US yields and dollar decline,” said Moh Siong Sim, FX strategist at Bank of Singapore Ltd. “This could signal the market is losing its appetite to fund America’s twin deficits amid a re-think of overweight US exposure by non-US investors that is just getting started.”