Speculation around possible currency agreements has emerged as a key theme in foreign exchange markets, according to Bank of America Securities, while the tailwind from U.S. fiscal policy is fading.
With the G7 Finance Ministers convening, expectations are rising for some form of foreign exchange statement—potentially including currency accords—Bank of America analysts noted in a May 22 report.
“This conversation has moved from the so-called ‘Mar-a-Lago Accord’ to more bi-lateral talks,” BofA Securities explained. “Actual and prolonged FX policy action still feels remote at this stage. Nevertheless, the U.S. administration is believed to want a weaker dollar, and that alone can impact sentiment.”
Given the number of developed market countries involved, the threshold for any significant policy shift remains very high. While actual currency accords among these nations at this point would be unexpected, the mere discussion has cooled what was already soft sentiment around the U.S. dollar.
“In the DM space any speculation of bi-lateral talk will most likely focus on US-Japan negotiations,” BofA added.
It remains unlikely that any countries will be officially designated as currency manipulators under the U.S. Treasury’s usual criteria. However, the current administration is known for its assertive stance and could use the forthcoming report to increase pressure on certain nations amid ongoing trade discussions.
“We expect the report sometime in June,” BofA said.
Meanwhile, debates in Congress regarding President Donald Trump’s tax and spending proposals have contributed to a higher term premium embedded in the U.S. Treasury yield curve, reflecting concerns about worsening deficit projections.
The U.S. dollar has generally weakened alongside a steepening Treasury curve, as the narrative to “sell U.S.” persists. Investors are increasingly viewing U.S. fiscal policy as a headwind weighing on the dollar’s strength.