The US dollar continued its losses to fall to its lowest level in four years against a basket of currencies on Tuesday.
The weakness was compounded by President Donald Trump's statement that the dollar's value is 'great', when asked about his opinion on the country's currency's decline.
At 9.30am, the US Dollar Index (DXY) was at 96.131 points, recovering slightly by 0.33% after suffering a sharp decline since last week.
The weaker US dollar is seen as having a mixed impact on the market. On the positive side, it is supporting the performance of multinational companies as overseas earnings are advantageous when converted into USD, thus limiting stock market volatility.
However, at the same time, a weak USD increases import costs and potentially contributes to inflationary pressures that are reflected in movements in the bond market.
The USD remains the mainstay of the US trading and financial system. Foreign investors' interest in US bonds and stocks remains strong, but exposure to the USD is increasingly avoided through hedging.
This situation increases the risk of a more significant USD depreciation, thus opening up the possibility that the Fed will have to raise interest rates to stabilize the currency.
The market interprets US President Donald Trump's statement as support for a lower dollar to stimulate exports.
However, excessive pressure on the USD risks triggering a sell-off of US Treasury bonds, exacerbating the weakening carry trade flow, and pushing up gold and silver prices.
However, this situation is not expected to trigger major volatility in the financial markets as a whole.
From a monetary policy perspective, the US Federal Reserve is expected to maintain the federal funds rate in the range of 3.50 to 3.75 percent after three consecutive rate cuts at the end of last year.
Market attention is now focused on the statement by Fed Chairman Jerome Powell for further guidance on the direction of monetary policy. Any aggressive tone from Fed officials has the potential to limit pressure on the USD in the near term.
