Tariffs and Policy Shifts Redefine Mid-year 2025 Global Currency Landscape

Escalating US tariffs, aggressive fiscal spending in Europe and Asia, and diverging central bank paths are reshaping global currency flows in 2025, driving sustained dollar weakness, safe-haven demand, and strategic opportunities across EUR, GBP, JPY, Asian FX, and select emerging markets.

Key Points

• ​In 2025, US tariffs rose to 14–17% from 2.5%, the dollar fell 10%, US GDP is 1.3% with 3% inflation, the Fed may cut, other G10 ease except the hawkish BOJ, Germany’s 2.5% spending and China’s stimulus back the euro and renminbi, CHF and JPY gain safe-haven support from 120% and 80% net positions and gold demand, Europe’s buffer steadies the euro, and Singapore’s SGD stays firm helped by MAS, China’s 5.8% local funds, 2% infrastructure, and 4% growth versus developed markets’ 1.6% while the ECB cuts 50bps.
  
  
• Tariffs at 14–17%, 3% US inflation, yields over 5%, eurozone GDP cut to 0.8% from 1.2%, and EM growth slowing to 3.9% from 4.4% with weaker commodities and debt risk if yields stay high but support from China’s stimulus and possible EM cuts if the USD drops keep FX volatility up and shape BRL, MXN, and IDR.
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• Europe’s €500 billion plan (1.1% growth), UK’s 1.2% growth and 3.5% rate, Japan’s 0.7% growth with low rates, China’s stimulus, USD down 10% and still softening, CHF, JPY, gold, and bonds remain safe havens, AUD, CAD, EM bonds (EM GDP 3.9%, inflation 2.1%) benefit if trade eases and yields drop, and SGD investors should add EUR, GBP, trim USD hedges, hold CHF, JPY (Swiss NIIP 120%, Japan 80%), keep gold, and hedge EM bonds with swaps.
  

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Rising tariffs, shifting rate paths, and diverging fiscal responses are redefining currency trajectories, favouring EUR, GBP, JPY, and SGD over a weakening USD

US Trade Policy and Economic Slowdown Drive Dollar Weakness

US tariffs have risen to 14–17% in 2025, up sharply from 2.5% at the start of the year, and this has significantly disrupted global trade flows and increased inflation uncertainty.
 
The US dollar has lost 10% of its value against a basket of currencies since its January peak, reflecting shifting investor sentiment and trade policy impacts.
 
The American economy contracted in the first quarter of 2025, and real GDP growth is forecast to slow to 1.3% this year while consumer price inflation is expected at 3.0%.
 
In contrast, the eurozone’s GDP growth is projected at 0.6% for 2025, supported by Germany’s €500 billion infrastructure plan despite ongoing trade tensions.
 
China’s GDP growth is forecast to slow to around 4.0% in 2025, with continued stimulus aimed at offsetting weaker exports and domestic consumption.
 
Meanwhile, the UK economy shows some resilience, with real GDP growth expected at about 1% for 2025 and a long-term growth potential of around 1.5%.
 
Diverging Monetary Policies Shift Global FX Dynamics

The US Federal Reserve remains in a wait-and-see mode and is likely to keep rates on hold for now but may cut aggressively if a significant slowdown emerges.
 
Other G10 central banks, except the Bank of Japan, are benefiting from disinflationary pressure and are expected to deliver rate cuts more quickly than previously anticipated.
 
The European Central Bank’s cuts are already boosting consumer confidence, leading households to save less and spend more.
 
In Japan, the Bank of Japan remains on a tightening path and may raise rates again by early 2026, supporting the yen relative to currencies where rates are falling.
 
Germany has lifted its debt brake and committed to greater infrastructure and defense spending, amounting to nearly 2.5% of German GDP, providing a fiscal boost for the eurozone.
 
China has ramped up stimulus through its 2025 budget and ultra-long-term bonds, reinforcing domestic consumption and supporting the renminbi despite ongoing trade tensions.
 
Swiss Franc, Yen and Gold Outperform as Safe-Haven Anchors

During the first half of 2025, US Treasury yields rose while the dollar weakened, showing that US policy uncertainty can undermine the dollar’s safe-haven role during volatility.
 
The Swiss franc and Japanese yen tend to appreciate in turbulent markets due to large net overseas asset positions, with Switzerland’s net international investment position at about 120% of GDP and Japan’s near 80% of GDP as of 2024.
 
In contrast, the US net international investment position is below -70% of GDP, which structurally limits its safe-haven resilience.
 
Gold demand has remained strong since the 2022 sanctions on Russian reserves, and ETF inflows have picked up in 2025, supporting diversification away from USD assets and indirectly benefiting CHF reserves.
 
Europe’s coordinated fiscal response, including Germany’s debt brake suspension adding nearly 2.5% of GDP, provides a buffer for the euro during global trade and security shocks.
 
These factors illustrate how CHF and JPY strengthen during stress, the euro remains stable due to fiscal flexibility, and the dollar’s haven role can weaken when policy uncertainty rises.
 
Singapore Dollar Holds Firm Backed by Regional Fiscal Support

Singapore’s trade-oriented economy remains sensitive to global tariff dynamics, with US tariffs continuing to weigh on global growth and regional exports, indirectly pressuring the SGD.
 
Despite this, disinflation in regions outside the US provides the Monetary Authority of Singapore with flexibility to maintain a relatively tighter policy stance compared to more aggressive rate cuts among G10 peers, supporting the currency’s relative stability.
 
Regional resilience is bolstered by China’s stimulus measures, including an increase in local government special funds spending contributing 5.8% of GDP and infrastructure spending adding 2.0% of GDP in 2025, which helps cushion ASEAN supply chains and provides a stabilising effect for the SGD.
 
Comparative real GDP growth expectations show China at 4.0% over five years, well above developed markets at 1.6% and the eurozone at 1.1%, indicating stronger regional demand that indirectly supports Singapore’s external sector.
 
Singapore’s cautious monetary stance contrasts with two additional 25 basis point ECB cuts expected in 2025, highlighting policy divergence that limits SGD depreciation.
 
Overall, a prudent policy path and spillover benefits from regional fiscal measures anchor the SGD amid external trade headwinds.
 

Persistent inflation, elevated US yields, and trade-driven risks are fuelling FX volatility and exposing emerging markets to commodity shocks and funding stress

Elevated Tariffs, Sticky Inflation and Rate Risks Fuel FX Volatility

US tariffs have increased to 14–17% in 2025, up from around 2.5% at the start of the year, creating substantial policy uncertainty that directly impacts trade flows and FX market volatility.
 
The US economy’s real GDP growth is expected to slow to 1.3% in 2025, while consumer prices are projected to rise by 3.0%, compared to an earlier forecast of 2.5%, showing that tariffs are feeding inflation pressures.
 
The Federal Reserve’s policy rate is projected to trend towards a neutral level near 3%, but longer-dated US yields have surpassed 5%, reflecting debt concerns and supply-demand pressures that contribute to rate market swings.
 
Geopolitical tensions, especially the sharp escalation of tariffs on major trading partners, have forced repeated revisions to economic and inflation forecasts, highlighting a key source of currency and bond market volatility.
 
The eurozone’s real GDP growth forecast has been cut to 0.8% for 2025 from near 1.2% previously, showing how trade uncertainty affects global economic expectations and FX stability.
 
Furthermore, the persistent mismatch between resilient equity prices and bond market caution underscores the disconnects driving cross-asset volatility.
 
This environment of high tariffs, sticky inflation, uncertain rate cuts, and geopolitical frictions ensures that FX markets will face further bouts of elevated volatility throughout 2025.
 
Emerging Markets Face Trade-Driven Growth Strain and Debt Risks

Slower global growth due to aggressive US tariffs is expected to drag global yields lower, which could weaken commodity export revenues for emerging markets and increase their FX vulnerability.
 
Emerging markets are forecast to grow by 3.9% in 2025, down from 4.4% in 2024, highlighting sensitivity to trade disruptions and commodity price swings.
 
Some emerging market central banks have room to cut rates if the dollar moves lower, offering policy flexibility without immediate currency depreciation risk.
 
China’s stimulus, including infrastructure spending equal to about 2% of GDP and special local government funding of 5.8% of GDP, supports regional demand and provides a buffer for Asian EM currencies tied to Chinese supply chains.
 
However, persistent global inflation and high USD-denominated debt expose EMs to capital outflows and FX stress if US yields stay elevated or the dollar unexpectedly rebounds.
 
This mix of slower trade-driven growth, commodity dependency, and funding costs underscores the dual challenge and opportunity facing EM currencies through 2025.
 

​Robust fiscal fundamentals, USD weakness, and global rate dispersion are reinforcing strategic allocations to developed currencies, safe havens, and selectively hedged EM FX

Euro, Pound and Yen Favoured by Strong Fiscal and Policy Fundamentals

Europe’s fiscal and monetary alignment remains supportive for the euro, with Germany’s debt brake suspension and infrastructure spending worth nearly €500 billion strengthening medium-term growth potential and providing a buffer against external shocks.
 
The eurozone’s 5-year GDP growth is projected at 1.1% and its 10-year growth at 1.2%, with inflation stabilising near 2.0%, and policy rates at 2.0%.
 
Japan’s strategy is anchored by the Bank of Japan’s comparatively tighter stance, with further hikes possible after 2025.
 
Japan’s projected 5-year GDP growth is 0.7% and 10-year growth 0.8%, with policy rates forecast to stay low at 0.7% (5-year) and 0.4% (10-year).
 
This divergence supports yen positioning against currencies from regions easing sooner.
 
For China and broader Asia, strong domestic stimulus and targeted support measures sustain local consumption and supply chain momentum.
 
China’s GDP is expected at 4.0% (5-year) and 3.7% (10-year), with moderate inflation at 1.6% to 2.3%, bolstering Asian FX linked to its growth, such as CNY, TWD, and MYR.
 
For portfolio allocation, developed market currencies like EUR and GBP are favoured due to robust domestic fundamentals and prudent fiscal frameworks.
 
The UK’s 5-year GDP growth stands at 1.2% with inflation around 2.2% and policy rates projected at 3.5% (5-year) and 3.3% (10-year), providing rate carry relative to peers.Overall, recommended positioning maintains a positive bias towards European and UK currencies, strategic exposure to the yen as a hawkish outlier, and selective Asian FX that benefit from China’s domestic strength and regional supply chain integration.
 
Dollar Weakness Supports Safe Havens, Commodities and Select EM Currencies

The document confirms that the US dollar has lost 10% of its value against a basket of other currencies since its January 2025 peak, and consensus expectations point to a weaker dollar in the second half of the year as relative growth gaps narrow and tariffs persist.
 
Gold, the Swiss franc, and the Japanese yen, alongside German, Japanese, and Swiss government bonds, remain the preferred safe havens during stress, benefiting from global capital seeking stability.
 
In an upside scenario where trade tensions partially ease, commodity currencies such as the Australian dollar and Canadian dollar are favoured due to their positive correlation with global trade recovery and resource demand.
 
Emerging market local currency bonds are highlighted as an attractive opportunity: with EM GDP growth still at 3.9% for 2025 and inflation at 2.1%, currencies like the Brazilian real, Mexican peso, and Indonesian rupiah can benefit if global yields moderate and investor appetite for carry returns.
 
The UK economy is projected to grow by about 1% this year, with a neutral Bank of England policy rate near 3%, supporting moderate sterling resilience.
 
Overall, short-term positioning leans towards safe-haven currencies and gold for risk-off protection, while medium-term allocations may tilt towards commodity-linked FX and EM local bonds if trade policy normalises and global rates drift lower.
 
SGD Portfolios Should Diversify into EUR, GBP, CHF, JPY, Gold and Hedge EM Bonds

SGD-based investors are advised to diversify currency exposure by allocating to major developed market currencies such as EUR and GBP, supported by euro area GDP growth forecasts of 1.1% over five years and the UK at 1.2%, with inflation stabilising around 2% for both regions.
 
Foreign investors have historically recycled surpluses into USD assets for over a decade, but with the US real trade-weighted dollar index remaining rich and a 0.8 percentage point downgrade in the US 2025 GDP forecast since January, there is a growing case to lower USD hedge ratios.
 
Safe-haven allocations to CHF and JPY are underpinned by Switzerland’s net international investment position at about 120% of GDP and Japan’s near 80% of GDP in 2024, reinforcing their strength during market stress.
 
Gold remains in strong demand as central banks diversify away from USD reserves; physical gold demand and ETF inflows have increased steadily since 2022.
 
For emerging market exposure, local currency bonds offer higher carry, with global EM GDP growth still at 3.9% for 2025, providing a yield advantage when funded in SGD and partially hedged with cross-currency swaps to manage costs.
 
This strategic reallocation aligns with the documented trend of reduced USD dominance and aims to maintain portfolio resilience for Singapore investors.