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The US dollar, along with Treasury bonds, is behaving more like a risky asset, highly susceptible to further declines as market sentiment wavers. While the dollar might experience temporary gains on positive trade news, a significant recovery hinges on a broader rollback of the current administration’s protectionist policies. A move in EUR/USD towards 1.15 is now a distinct possibility.
The dollar is exhibiting new high-beta behavior, with the FX market reflecting substantial losses against most G10 currencies except the Norwegian krone. This confirms a dollar confidence crisis, underscored by declining equities and Treasuries despite a lower-than-expected CPI reading.
The market is dismissing inflation concerns, focusing instead on the threat of slowing growth combined with persistent inflation. The strength of recent Treasury auctions is overshadowed by widening USD swap spreads and a general bearish outlook for Treasuries. The budget resolution adds further risk to both equities and Treasuries.
The dollar’s decline reflects a “sell America” sentiment. The shift to safe-haven currencies like the Swiss franc, Japanese yen, and even the euro, is driven by the dollar’s diminished safe-haven status. The drop against high-beta currencies suggests market positioning for a broader dollar decline.
Predicting a dollar bottom is as uncertain as anticipating policy decisions on tariffs. The dollar’s current behavior as a risk-sensitive currency, rather than a safe haven, means that only a considerable reversal of protectionist measures can repair the recent damage.
