By: Franklin ASARE-DONKOH
The International Monetary Fund (IMF) has said in its World Economic Outlook update for July 2025 that some investors have identified structural factors as drivers for the United States (US) Dollar depreciation, including shifts away from US securities.
“Increased hedging against dollar weakness resulting from investor concerns about changes in the historical hedging properties of the dollar has contributed to its depreciation in part.
However, whether such a switch in the currencies’ perceived risk-hedging properties is temporary or proves longer-lasting remains uncertain at this juncture,” the report said.
The report says current data on cross-border capital flows does not suggest a broad-based pullback.
The US dollar has weakened considerably since April, although yields in the United States are higher than those in other advanced economies such as the euro area.
The report, however, noted that many emerging market currencies have appreciated, and capital inflows have resumed since April, with investors seeing space for some emerging market central banks to ease.
The report further indicated that global financial conditions have eased since the April Global Financial Stability Report, reverting toward accommodative conditions by historical standards.
Equity valuations have returned to lofty levels, and corporate credit spreads have tightened to the lows attained at the beginning of the year, whereas market volatility has declined, despite still-elevated uncertainty regarding trade policy.
Market participants remain attentive to any lagged impact from tariffs on economic data, which so far remain largely resilient.
It said, “A rebound of tariffs to meaningfully higher levels following the end of the pauses in effect could weigh on market sentiment, potentially triggering again a sharp repricing in risk assets.”
The report also indicated that monetary policy paths in major advanced economies are expected to be shallower compared with what was expected in April and remain uneven across countries, reflecting different stages of cycles amid varying paces of disinflation.
Market pricing implies the European Central Bank, after having cut sequentially, may cut rates once more this year before ending its current easing cycle, and that the Federal Reserve and Bank of England will continue easing, with each cutting rates around twice more this year after pausing to assess incoming data. Japan remains an outlier, with markets pricing in a modest, though declining, likelihood of another rate hike this year.
“Sovereign yield curves for major advanced economies have steepened since April as bond issuance has continued to rise. This has coincided with widening fiscal deficits and reduced demand for duration by liability-driven investors as well as quantitative tightening, pushing up longer-term yields.
Despite bouts of upward yield pressures in advanced economies, local currency yields in emerging markets have generally declined, aided by a weaker dollar,” parts of the report read.
