The big currency winners of 2025 so far do not include the dollar

LONDON (Reuters) - Donald Trump's second presidency is having a dramatic impact on currencies around the world, though not in the way investors anticipated just a few months ago. 

The dollar has weakened this year against all other developed market currencies, except Canada's, on concern that tariff uncertainty is harming the U.S. economy.

"Tariffs, generally speaking, tend to be good for the dollar," said Barclays FX strategist Lefteris Farmakis. "But when they are applied against very close trading partners, they can harm confidence in the U.S." 

U.S. recession risks are growing and investors also see reasons to buy the likes of the euro, Swedish crown and Japanese yen in their own right.

Here's a look at some of stand-out movers. 

1/ EURO TRANSFORMED

Germany's historic proposal to ramp up defence and infrastructure spending have catapulted the euro higher. It posted its biggest weekly gain versus the dollar since 2009 last week and is set for its best quarter since 2022, with a 5% rise.

At around $1.09, the euro is at its highest since the November 5 U.S. election. BofA sees further gains to $1.15 by end-2025. 

The euro has also risen against sterling and the Swiss franc. 

The European Central Bank approaching the end of its easing cycle and Europe's increased defence spending has changed the outlook for the euro in a fundamental way, said Kenneth Broux, head of corporate research FX and rates at Societe Generale, noting U.S. tariffs remained a risk to euro gains.

2/ GO THE YEN 

Another big gainer has been the yen, some 6% stronger against the dollar so far this year thanks to higher Japanese rates and safe-haven flows during turbulent times.

"If you want to hedge against the risk of slowdown in the U.S. you go to Japan because of the risks for lower U.S. Treasury yields," said Barclay's Farmakis. 

The yen is particularly sensitive to changes in the gap between U.S. and Japanese borrowing costs. Yen-positive developments at home meanwhile include companies meeting union demands for substantial wage increases. 

That could push the Bank of Japan to accelerate rate hikes, lifting the yen's appeal after four straight years of declines. Speculators have mounted their biggest ever wager that the Japanese yen will continue to rise. 

3/ UNFRIENDLY NEIGHBOUR

Pressure on currencies in Canada and Mexico, the two largest U.S. trading partners, has abated but is unlikely to disappear soon.

ING says current trading levels suggest a 2% risk premium is priced into the Canadian dollar, half the peak risk premium seen in early Feb when it hit 22-year lows versus the greenback. 

Mexico's peso has appreciated 5% from three-year lows hit last month against the dollar. At around 20.10 per dollar, the peso has moved back towards pre-U.S. election levels. 

Trump's suspension of 25% tariffs imposed on most goods from Canada and Mexico are positive. But universal steel and aluminium tariffs took effect Wednesday, drawing retaliation from Canada - the biggest foreign supplier of steel and aluminium to the U.S. - and encouraging another Bank of Canada rate cut.

No surprise that implied volatility in Canada's dollar remains elevated.    

4/ NOT SO FRAGILE CHINA 

China's yuan was expected to suffer more than most currencies from Trump's policies. Some expected Beijing would allow its closely-managed currency to weaken to mitigate the impact of tariffs, as it did during Trump's first presidency, particularly in the trade war of 2018 and 2019. 

China has been hit by more tariffs than most, but the yuan, on and offshore, has strengthened this year to trade around 7.25 yuan per dollar. 

BofA said one reason Chinese authorities haven't encouraged a weaker exchange rate against the dollar is that other emerging Asian currencies have strengthened more than the yuan, supporting Chinese exporters.

"China is still achieving a relative trade weighted depreciation of the yuan against its key trading partners, despite modest yuan appreciation against the dollar," it said. 

5/ CROWNED IN GLORY 

One currency that has surged against the dollar, and perhaps gone under the radar, is Sweden's crown. 

It has strengthened 9% to near 10 crowns per dollar, the firmest since late 2023, and has even held its own against a resurgent euro. 

A strong performance for European shares, Ukraine-Russia ceasefire hopes and improved Swedish economic prospects explain the outperformance, analysts said.

In addition to its sensitivity to European stocks, the crown is also benefiting from a surge in defence stocks. As a share of gross domestic product, Sweden is overrepresented among European defence stocks, notes Societe Generale.    

(Reporting by Alun John and Dhara Ranasinghe in London and Yadarisa Shabong in Bengaluru, editing by Christina Fincher)