The early months of 2025 saw a dramatic surge in global risk aversion. President Trump’s tariff threats, and their eventual imposition, drove riskier assets, like stocks, through the floor. Surprisingly, this bout of huge global risk aversion was accompanied by a dramatic slump in the US dollar. This was not supposed to happen. The US dollar is meant to act as a safe haven and rally, even if the source of the threat comes from the US. That’s what we saw during the global financial crisis. But not anymore.

The key question from that episode last year was whether the US dollar had permanently lost its safe-asset status or whether this was just a one-off. Fast forward to last week, and we saw another notable spike in global risk aversion, again related to US tariffs but this time also encompassing questions around the US’s ability and willingness to ‘take’ Greenland. The result was another slump in the US dollar.

Clearly it was not as big as the one early last year, but that’s largely because US threats were rescinded almost as quickly as they were initiated. If we now know, or at least suspect, that the US dollar will fall when shocks happen and global risk aversion increases, then this should make us more concerned about the US dollar going forward.

For if the US dollar has relied on these occasional bouts of risk aversion in the past to keep the uptrend in place, the volte-face in its safe asset status would seem to add a notable downside risk to the currency. However, we feel it is more than just those bouts of sharp increases in risk aversion that are important here. For if the US dollar really has lost its safe-asset status, that’s likely to impact its performance even during those periods when risk aversion is not surging.

In other words, if something is happening in the US that is undermining the US dollar’s safe asset status, it is likely to be present all the time and, therefore, pulling the US dollar down all the time. What’s more, it seems very easy to list the factors that could be undermining the US dollar’s status. These include tariffs, threatened land grabs, tough migration tactics, pressure on the Fed to ease policy and probably more besides. These factors might be lifting economic growth, but if the tactics leave a bad taste in the mouth of investors, it seems likely that the US dollar will decline.

However, Steven Barrow, Head of Standard Bank G10 Strategy, does not see a fall this year that’s on par with the near 10% fall that we saw last year in trade-weighted terms. He expects a more sedate 5%, or so, but more bouts of significant risk aversion, perhaps caused by US policymakers, could make the decline much larger.

To the list of negative influences on the US dollar, we might be able to add FX intervention should the US join with those from Japan to try to lower the US dollar against the yen. Speculation has intensified following reports that both the Bank of Japan and the Federal Reserve checked prices last Friday. Intervention from the BoJ would not be a huge surprise given that the bank has acted at similar levels of dollar/yen in 2024. But any joint intervention with the US would be particularly notable, as we have not seen the Fed act on the yen since 2011.

Given the lack of US help for many years now, it might seem hard to rationalise the need to act now, particularly if the Fed has not involved itself in BoJ intervention in the recent past when dollar/yen has been up close to 160. However, we’re in little doubt that if the US authorities were to support Japanese intervention, it would be driven by a desire to see Japanese bond yields stabilise and fall, not necessarily US dollar/yen.

For the real threat to the US from what is happening in Japan lies in the bond market, not the FX market. If long-term Japanese yields continue the sort of rise that we saw earlier in the month, this could have adverse effects on US yields and we know that the US Administration is very sensitive to higher long-term US yields as these prevent a significant fall in mortgage rates, whether or not the Fed is easing. From this perspective Fed intervention would seem to make sense.

However, intervening to weaken the US dollar could undermine foreign demand for treasuries and so still cause a rise in yields. In sum, Steven Barrow is skeptical about US intervention and also skeptical that the US dollar/yen is about to plunge in some sort of intervention rout.