The shifting landscape amidst a more unpredictable set of policies from the US administration has forced a major reconsideration of the US Dollar as the choice currency. Chinese investors are shifting from US Treasuries to European bonds, particularly German, Spanish, and Italian debt, while global asset managers like Vanguard and Citigroup favor European bonds, expecting ECB rate cuts and improved fiscal conditions.

Japan’s March CPI data indicates persistent inflation, with core CPI rising 3.2% year-on-year, exceeding the Bank of Japan’s 2% target for nearly three years. This reinforces the central bank’s overall hawkish stance, though the BOJ is expected to cautiously pause rate hikes due to economic pressures from U.S. tariffs on Japanese goods. U.S.-Japan trade talks are progressing, with Japan aiming for favorable tariff exemptions, potentially sparking a relief rally in risk assets and impacting yen long positions, while a second round of discussions on April 24 may address currency issues amid U.S. accusations of yen weakening. Speculative net long yen positions have surged to 171,855 contracts, and a major Japanese bank has lowered its year-end dollar forecast to 137.50, citing concerns over U.S. stagflation and asset credibility.

The Australian Dollar has been performing well of late, potentially signaling a bottoming process for AUD/USD amid a shift away from USD assets and possible Chinese policy support against U.S. tariffs. Despite a robust Australian labor market with a March unemployment rate of 4.1%, the Reserve Bank of Australia is expected to cut rates in May, as markets anticipate economic growth concerns will outweigh inflation risks, with the RBA’s April meeting minutes indicating a cautious approach to policy adjustments. The U.S.-China trade tensions have weighed more heavily on the U.S. dollar than Aussie, positioning the dollar as a new risk currency, while markets await further Australian economic data to confirm the RBA’s rate cut decision at the May 19-20 meeting.