Strategists at the biggest Wall Street banks also see the potential for further weakness. — Bloomberg
WORRIES over global trade dragged the dollar to a six-month low on Monday, leaving investors bracing for more weakness ahead.
The Bloomberg Dollar Spot Index extended declines for a fifth day, falling a total of 3.3% during that stretch.
While Treasuries and stocks rallied on news that President Donald Trump will delay levies on some popular consumer electronics, sentiment on the dollar was undermined by his warnings that the exemption will prove temporary.
Protracted sell-offs in the greenback and Treasuries – typically seen as havens in turbulent times – have exacerbated concerns that investors are lightening up on US assets in the face of tectonic trade policy shifts and broader political uncertainty.
Weakness in the dollar and Treasuries is a “horrible, toxic combination,” said Jordan Rochester, head of macro strategy for EMEA at Mizuho International Plc, in an interview on Bloomberg Television.
The Bloomberg Dollar Spot Index finished Monday down 0.3%.
The gauge has fallen about 6.1% so far this year, on track for its biggest annual loss since 2017.
Positioning in the options market suggested traders were hedging against further declines. An index measuring three-month risk reversals – or the spread between call and put options – on the dollar against its major peers has dropped to a five-year low.
That indicates greater demand for put options that would benefit from a weaker dollar than for call options that would gain from a stronger one.
The S&P 500 index gained 0.8% on Monday. The yield on 10-year Treasuries fell 11 basis points to 4.38%.
A five-day bond market sell-off unleashed by anxiety over Trump’s trade war sent 10-year Treasury yields to the biggest weekly surge in over two decades last week.
Lasting damage?
The discussion that has dominated Wall Street for much of the past week has centred on whether Trump’s actions, even if they are eventually reversed, have inflicted lasting damage to the idea that the US dollar and Treasuries are the ultimate risk-free assets.
“We are talking about a regime change in the way the market views the dollar, particularly during times of global financial stress,” Steve Barrow, a strategist at Standard Bank, wrote in a note to clients on Monday.
“We’d note that the other key component of the US’s safe-asset allure – the Treasury market – has not been particularly safe.”
That view was echoed by Derek Halpenny, head of global markets research at MUFG Bank, who focused on weekend remarks from Trump and commerce secretary Howard Lutnick stressing a longstanding plan to apply a different, specific levy to the technology sector.
“It is difficult to see any fundamental factor that will likely improve investor sentiment,” Halpenny wrote in a report. “Key levels were broken last week for the dollar.”
Less bearish
One-week risk reversals on the Bloomberg dollar index moved toward parity for the first time in five days, a sign that traders are becoming less bearish on the greenback.
Still, the gauge has remained in negative territory for a third straight day, with bearish sentiment toward the US currency at levels unseen since the pandemic.
“Trump’s actions have persistently damaged the ‘US brand’,” wrote Dana Malas, a strategist at Skandinaviska Enskilda Banken AB.
“This means that dollar assets, both inside and outside the United States, should continue to carry higher risk premiums.”
Almost 80% of respondents to a Bloomberg survey predicted the dollar would weaken further over the next month, the biggest proportion of bears since the surveys began in 2022.
Strategists at the biggest Wall Street banks also see the potential for further weakness.
JPMorgan Chase & Co analysts suggested investors remain bearish against the dollar, especially against the yen and euro, as there’s still a chance of a US recession.
Mizuho Bank Ltd anticipates the US currency may fall another 5% on a trade-weighted basis before rebounding, based on how it traded in 2017 to 2018 and during the pandemic.
“The design and implementation of these tariffs should have a negative impact on the currency because they have contributed to eroding consumer and business confidence,” Goldman Sachs Group Inc analysts including Kamakshya Trivedi wrote.
“If tariffs weigh on US firms’ profit margins and US consumers’ real incomes, like we think they will, they can erode that exceptionalism and, in turn, crack the central pillar of the strong dollar,” they said. — Bloomberg
Matthew Burgess and Naomi Tajitsu write for Bloomberg. The views expressed here are the writers’ own
