The U.S. dollar is poised for its biggest weekly decline in a year as President Donald Trump's Greenland deal and shifting geopolitical landscape have weighed heavily on investor sentiment. The currency has faced significant pressure following Trump's announcement of securing U.S. access to Greenland through a NATO agreement, which came alongside his decision to back away from European tariff threats.

Dollar Index Records Sharp Weekly Decline

The dollar index, measuring the U.S. currency against six major units, traded at 98.329 after dropping 0.58% in the previous session. The currency is on course for a 1% weekly slide, marking its worst performance since January 2025.

Thierry Wizman, global FX & rates strategist at Macquarie Group, noted that while the Greenland deal addresses immediate tariff and invasion concerns, it doesn't resolve the core issue of seeming alienation among allies. "And that's not a good place to be if you want to preserve the USD's reserve-currency status," Wizman stated.

Bank of Japan Decision in Focus

Investor attention on Friday centers on the Bank of Japan's policy decision, where the central bank is broadly expected to maintain rates steady after raising its policy interest rate to a 30-year high last month. Market participants will closely watch Governor Kazuo Ueda's comments for signals about the timing of the next rate hike and any hawkish policy shifts to support the struggling yen.

Yen Under Mounting Pressure

The yen has faced relentless selling pressure since Sanae Takaichi became Japan's prime minister in October, declining over 4% on fiscal concerns. The currency wobbled at 158.50 per U.S. dollar in early Asian trading and is heading for its fourth consecutive weekly drop, a streak last seen in September. Traders remain wary that a break beyond the 160 level could prompt Tokyo to intervene in currency markets.

Magdalene Teo, head of fixed income research for Asia at Julius Baer, explained that the yen continues to be sold as investors fear the BOJ's monetary policy remains too accommodative while inflation risks rise. "For sustainable JPY appreciation, this would require significant investment domestically and a strong belief that Takaichi's administrative policies will eventually translate into growth and fiscal health," Teo noted.

Bond Market Volatility Reflects Fiscal Concerns

Japan's bond market experienced significant turbulence this week, highlighting investor anxiety about the country's fiscal position. Prime Minister Takaichi's call for a snap election and promises of tax cuts sent Japanese government bond yields to record highs, underscoring market concerns about fiscal sustainability.

Carol Lye, portfolio manager at Brandywine Global, emphasized the need for concrete action from authorities. "If there's no action, then it's just words. It's not going to anchor the market down," Lye stated, adding that rate hikes are not coming quickly enough to stabilize conditions.

Other Currency Movements

In broader currency markets, the Australian dollar remained steady at $0.6841, while the New Zealand dollar weakened 0.25% to $0.5914. Bitcoin advanced 0.37% to $89,518.13, moving away from the week's earlier lows as cryptocurrency markets showed modest recovery.

US President Donald Trump's comprehensive policy approach spanning debt management, trade relations, sanctions, and national security measures has emerged as a potential catalyst in determining the future trajectory of global currency dynamics, according to a detailed analysis from Wall Street investment bank Morgan Stanley.

Policy Impact on Currency Transition

The Morgan Stanley report, published on Wednesday ahead of Trump's anticipated address at the World Economic Forum in Davos, examines how current policy uncertainty could influence the ongoing global shift toward a more multipolar financial system. The analysis suggests that Trump's policy framework presents a broadly neutral to mildly accelerating effect on the gradual transition away from dollar industries dominance in international markets.

The bank emphasizes that near-term policy developments will prove critical in determining the extent and pace of any currency realignment. While acknowledging the dollar's slowly declining role over the past 25 years, Morgan Stanley notes the absence of a clear alternative global reserve currency positioned to assume dominance.

Gold Emerges as Primary Challenger

The precious metal has significantly strengthened its position as the dollar's most formidable competitor, driven by its surge to record-high price levels over recent months. This remarkable price appreciation has fundamentally altered the composition of global central bank reserves.

The shift represents a milestone moment in global finance, with foreign central banks now holding more value in gold than in US government securities for the first time in nearly three decades.

Trade Policy and Geopolitical Implications

Trump's frequent deployment of tariffs as negotiating instruments has introduced additional complexity to international currency dynamics. The current diplomatic tensions with European nations, particularly regarding Greenland acquisition discussions, have strained transatlantic relationships and raised questions about NATO alliance stability.

Morgan Stanley's analysis reveals conflicting forces at play:

• Alliance Effect: Historical data indicates that strong international alliances typically boost reserve currency holdings among partner nations by significant margins
• Safe-Haven Demand: Geopolitical instability often triggers flight-to-safety movements, potentially increasing dollar demand
• Institutional Pressure: Growing concerns about Federal Reserve independence and US fiscal sustainability

Fiscal Sustainability Concerns

The report highlights mounting concerns regarding US debt levels and long-term fiscal sustainability as additional factors influencing global currency assessments. These fiscal considerations, combined with questions surrounding the independence of key American financial institutions, are increasingly factored into international evaluations of the dollar's future role.

Market Outlook and Implications

Morgan Stanley warns that the balance between opposing market forces will ultimately determine whether current trends accelerate or stall the dollar's gradual transition within the global financial system. The bank's analysis suggests that policy decisions made during Trump's administration could prove decisive in shaping both the pace and scale of any movement away from dollar-centric international finance.

The evolving currency landscape reflects broader shifts toward multipolarity in global economics, with central banks diversifying reserves and exploring alternative store-of-value assets. As geopolitical tensions persist and trade uncertainties continue, market participants will closely monitor policy developments for signals about the dollar's long-term trajectory in international markets.