Top officials from the monetary and capital markets department of the International Monetary Fund ( IMF ) have played down global market concerns over the recent “unusual” decline in the US dollar accompanied by falling US stock and bond prices.

“It is somewhat unusual to see the dollar decline in the recent two weeks, really, when equity prices traded down with a negative tone and when longer‑term yields increased,” says Tobias Adrian, the IMF financial counsellor who heads the department. “But how lasting that is, is really too early to tell.”

Adrian was speaking to reporters at the spring meetings of the IMF and World Bank in Washington on April 22 amid continued market volatility after the US announced “reciprocal tariffs” on most trading partners and additional tariffs on China this month.

‘Depth and size of the markets remain’

“US capital markets remain the largest and most liquid capital markets in the world,” Adrian says.

“When you look at US dollars as a reserve asset, that remains over 60% among reserve managers. Global stock market capitalizations increased to 55% most recently, up from 30 % in 2010.

“So, we have seen price movements that are notable. But in the big picture, the depth and size of the markets remain where they have been.”

On capital markets in general, deputy division chief Caio Ferreira said market development has come “hand‑in‑hand with the growth of non‑banking financial institutions that we are seeing across the globe”.

“We see this as a potential positive development. You diversify the sources of funding and the credit to the real economy, diversify the risks across a broader set of institutions, this is good for the economy and financial stability.”

Fereira cites “risks that need to be mitigated”, such as leverage and links between different kinds of institutions.

“But overall, there are policies created by the standard setters that, if implemented, can mitigate these risks,” he says.

‘Dollar decline in line with earlier appreciation’

On the dollar’s recent decline, Adrian says it was “roughly of commensurate magnitude” to the appreciation earlier this year.

“The volatility in the exchange rates is reflecting the broader volatility,” he notes.

“There are some indications that the exchange rate movements are related to flows to investor reallocations, but the magnitudes of those flows are relatively small, relative to the run‑up of inflows into US assets in recent years.

Impact depends on how uncertainly resolved

“The cumulative inflows into bonds and stocks from around the world have been quite pronounced. So, to what extent these movements in the exchange rate and the associated flows are just a temporary or a more permanent impact remains to be seen.

“It really depends on how the current uncertainty is going to be resolved,” the IMF financial counsellor says.

“There are various scenarios. For the moment, it's highly uncertain. It is notable that the dollar declined, but I would not jump to conclusions in terms of how permanent that move may be.”

Jason Wu, assistant director of the department, adds that when exchange rates were very volatile, “one of the key channels for financial stability could be pressures in various funding markets.

Cross-currency and repo markets

“And this includes in cross-currency markets, as well as in repo markets and other secure financing markets. This is something that we will be watching very closely.

“So far, we have not seen any major disruptions in those markets, despite the very volatile exchange rates.”

Adrian recalls a “risk-off moment” in August last year when the unwinding of leveraged trades in equity and foreign exchange markets – notably currency carry trades, especially those funded in yen – triggered a 12% slump in Japanese equity prices in a single day.

“That was very short, but that did lead to dislocations in those cross‑currency funding markets. And we haven't really seen that in recent weeks,” Wu says.

In previous episodes of distress, such as the Covid-19 shock in 2020 and the global financial crisis in 2008, Adrian notes that swap lines from central banks – including the Bank of England, the European Central Bank, the Bank of Japan, and the Federal Reserve – “played an important role in terms of stabilizing market liquidity”.

But “central banks have not intervened for liquidity purposes in recent weeks. And, despite a heightened market volatility … we have seen a very, very smooth market functioning across the board.”

US bond volatility ‘within reasonable historical norms’

On the US bond market, “we are looking at the pricing of longer-duration treasuries very carefully. We particularly look at supply factors, demand factors, and technical factors.

“We have seen volatility in the price moves, but we think that those are within reasonable historical norms.”

On the smooth functioning of the market, Wu says: “Buyers can find sellers and transactions are going through. I think that's a very important sign.”

On leveraged trades in the treasury market, “these are trades that have not very much to do with economic fundamentals in the US or elsewhere but, rather, are using leverage to capture arbitrage opportunities in markets.

“When these trades are unwound, there will be impact in the treasury market,” he says, adding that these include so-called treasury cash‑futures basis trade and swap-spread trades.

Unwinding of leveraged positions

“During this episode, given the very heightened volatility, we have seen evidence of some of these positions being unwound, potentially having an impact on treasury yields as well.”

But “this is not about capital outflows”, Wu says. “It's about unwinding these trades having amplified the recent price movements in treasury markets.”

Adrian says there is “some indication” of lowering leverage in these trades. “But we haven't heard of disorderly deleveraging at this point.”

“We haven't seen the kind of adverse feedback loop that was common, say, in 2008 or even as recent as the Covid-19 shock,” he says.