US dollar hits two-month high as weak growth in Europe and Asia hit G10 currencies

The dollar climbed near a two-month high on Wednesday, according to Bloomberg, as currencies across Asia-Pacific and Europe got hammered by growing economic and political risks.

The Bloomberg Dollar Spot Index rose 0.2%, closing in on its strongest level since August. Hedge funds in Asia have started buying more put options against the euro and yen, betting those currencies will fall even further.

The bounce comes after the dollar hit a two-year low in September. But with growth fears outside the U.S. stacking up, the dollar is getting picked up as a safer bet.

The euro took a blow from chaos in France’s parliament, while the yen dropped over growing speculation that Japan’s next prime minister might slow down rate hikes and turn up fiscal spending instead.

On top of that, the New Zealand dollar collapsed to its lowest in six months after the country’s central bank cut rates deeper than expected and said more cuts could still come.

Hedge funds dump euro and yen as the dollar gains ground

The sharp swing toward the dollar came with heavy moves from hedge funds, which dumped riskier currencies like the euro and yen. Traders in Asia said those funds poured into bearish bets, with fresh rounds of option buying that paid off as both currencies slid.

The euro’s weakness was tied directly to the ongoing political mess in France, which has shaken investor confidence. Meanwhile, Japan’s currency was dragged lower after talks intensified around a possible leadership change that could bring looser monetary policy and more stimulus.

The dollar also surged against the New Zealand dollar. On Wednesday, New Zealand’s Reserve Bank unexpectedly slashed interest rates more than forecast and openly flagged that more cuts are on the table. That hit the kiwi hard, pushing it down to levels not seen since April.

Despite the U.S. still stuck in a government shutdown, traders focused more on global weakness than Washington gridlock. The fear outside the U.S. has outweighed the dysfunction within it, and that has turned the dollar into the go-to safe bet.

IMF warns that rising uncertainty boosts dollar demand and FX risks

The IMF said in its latest Global Financial Stability Report that nearly $10 trillion changes hands daily in the foreign exchange market. It warned that the entire market is becoming more fragile as nonbank financial institutions (NBFIs) play a bigger role in handling currency risk and sourcing foreign funding.

The IMF’s report made it clear: when global uncertainty jumps, investors run toward safety; and that’s usually the dollar.

The report said, “Dollar purchases by non-U.S. residents tend to increase by 24 percentage points following a sharp spike in financial uncertainty.” That’s exactly what happened at the start of the COVID-19 pandemic in March 2020. It found that this demand surge was mostly driven by NBFIs, whose trades help during calm periods but add fragility during market stress.

When fear grips the system, things get expensive. Currency bid-ask spreads widen, exchange rates swing hard, and costs rise for both hedging and foreign funding. The IMF said this shows up clearly in the cross-currency basis, a financial measure that tracks the cost of swapping currencies. The wider that basis gets, the more pressure there is in the system.

The pain is worse in emerging markets, where dollar liquidity is harder to come by. Rising hedging costs also drive up bond yields and make stocks riskier. For countries with big debt loads or banks with mismatched currency exposure, the stress can snowball into a broader crisis.

But market panic doesn’t just come from economic data. The IMF flagged operational failures, like tech outages, cyberattacks, and settlement issues, as another major threat to FX market stability. Even short outages in trading platforms can wreck liquidity, while failed settlements raise volatility.

To fix this mess, the IMF said central banks and regulators need to run more liquidity stress tests, fix data gaps, and prepare emergency frameworks for fast-moving shocks. It also pushed for better cybersecurity, backup systems, and settlement tools that prevent one side of a trade from defaulting.

In the final lines of its report, the IMF said, “Comprehensive surveillance, stronger safeguards, and modernized platforms can reduce risk, enhance efficiency, and better position foreign exchange markets to support global finance.”

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