US Dollar Decline: Impact on Indian Rupee, Bond Market & Emerging Currencies

12-04-2025

06:30 AM

1 min read

What’s in Today’s Article?

The U.S. dollar has sharply declined despite President Trump pausing his trade moves, reflecting reduced confidence in the American economy.
Traditionally, market volatility boosts demand for dollar assets, but this time, investors are fleeing to other safe havens like the Swiss franc, Japanese yen, euro, and gold—which hit a record high.
Wall Street stocks also fell after a brief rally, and long-term U.S. Treasury yields are rising, signaling a major weekly jump not seen since 2001.

Weak Opening
- The Indian rupee opened weak on April 11 despite favorable global cues.
Support from Dollar Decline
- A continued sharp decline in the U.S. dollar index and falling oil prices are expected to support the rupee in the near term.
Rupee Outlook
- According to experts, while the rupee may gain some strength, it is unlikely to appreciate beyond the 86 level.

President Trump's reversal on tariffs is believed to have been prompted by a sharp selloff in U.S. government bonds, signaling plummeting confidence in the American economy.
Major foreign investors like Japan and China reportedly dumped U.S. debt amid growing trade war concerns.

Government bonds are debt instruments issued to fund public spending, offering interest in return.
- The U.S. currently has over $35 trillion worth of bonds in circulation, much of it held by foreign investors.

Higher bond yields (and lower bond prices) tend to attract foreign capital, strengthening the domestic currency.
This is part of the carry trade strategy, where investors borrow in low-interest economies to invest in high-yield markets, influencing global currency flows.

Historically seen as safe, U.S. bonds are now facing volatility.
Yield spikes suggest rising risks, making it more costly for the U.S. government to raise funds and potentially affecting its ability to finance key programs like Social Security and Medicaid.

For the first time in two years, investors are demanding a higher premium on junk-rated U.S. debt compared to European equivalents—indicating fears of a significant economic slowdown.

Q1. Why is the US dollar declining suddenly?

Ans. Due to falling investor confidence, bond selloffs, and shifts toward safer currencies and gold.

Q2. How does the dollar decline impact the Indian rupee?

Ans. It lends support, but rupee remains weak amid uncertain global trends and market volatility.

Q3. What triggered Trump's tariff pause?

Ans. A steep selloff in U.S. bonds and fear of economic slowdown influenced the decision.

Q4. What is the relation between bond yields and currency value?

Ans. Higher yields attract foreign capital, boosting currency strength through carry trade strategies.

Q5. Why are investors avoiding US bonds now?

Ans. Rising yield risks and fears of U.S. economic slowdown are reducing bond market confidence.

Source: IE