The US dollar paused its depreciation after a significant step down in the second quarter of 2025, according to BIS quarterly review. While dollar depreciation has historically been a marker of risk-on phases in financial markets, the dynamics over the review period did not match historical patterns, it said. The risk-on tone was accompanied by an appreciation of the currency following the unveiling of the US fiscal package in early July.

BIS noted another unusual development in the general risk-on environment in the dynamics of the US dollar. The dollar appreciated while equity markets were posting strong gains. This appreciation is somewhat at odds with the dollar's tendency to soften in periods of heightened risk-taking, the Bank stated.

Moreover, US dollar dynamics during the review period also did not square well with interest rate differentials, it said. Typically, higher differentials between short-term yields on US Treasuries and German bunds have been associated with an appreciation of the dollar against the euro. Yet this historical pattern broke down in the aftermath of the April 2025 tariff-related turbulence when positive and widening yield differentials went hand in hand with dollar depreciation, BIS noted. As US rates declined after July while those in the euro area edged up, the interest rate differential narrowed, but the dollar actually firmed.

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