RBI in its financial stability report stated that the US dollar faced sharp depreciation pressure against most major currencies in the recent market turmoil. Typically, the USD tends to outperform other currencies in two entirely different scenarios; during periods of global stress as well as when the US economy exhibits exceptional growth, on the other hand it underperforms when global growth is strong relative to the US ' the so-called 'dollar smile'. This has been the defining framework for forex investors for a considerable period. However, in the current episode of exceptional economic uncertainty, the prices of US financial assets, including equities, have fallen forcing global investors to rebalance their portfolio. This has contributed to the depreciation of the USD, as growth slowdown fears and fiscal worries continue to weigh on the dollar.

Moreover, RBI noted that the correlation between the USD and the US Treasury bond yields has diverged since the tariff announcements in April. In parallel, investors are increasingly hedging their holdings in dollar-denominated assets, which could put further pressure on the USD. Moreover, there are structural changes happening in the global economy such as a major shift in the US trade policy and resetting of the global economic order. Thus, we could be entering uncharted territory in the global financial system as the USD's primacy and safe-haven status are being challenged, the central bank alerted.

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