Tuesday Teaser: Winds of Change for the $

In our 2nd June 2025 issue of Seeking Value - Multi Assets and the Week Ahead, our brief analysis examined the Currencies market, specifically the US Dollar – our conclusion: Downside risk is prevalent. Below is an excerpt of our Seeking Value newsletter – if you wish to be added to a pre-release list, DM us, click follow to be notified, or email us at info@sr.services

History shows - a Strong Dollar is not always a given

Heraclitus, the ancient Greek philosopher, famously said, "The only constant in life is change." This sentiment resonates deeply with the financial markets, where new challenges and opportunities occur every week. 

Last week was no exception, as markets balanced cautious optimism with persistent uncertainty. It was a week in which early signs of disinflation provided a glimmer of hope, yet tariff concerns and tepid growth forecasts kept investors on edge.

Global currency markets were no exception, remaining on edge as traders dissected monetary policy clues and economic indicators to gauge the potential direction of central bank actions. The U.S. dollar, alongside other majors and emerging-market (EM) currencies, reflected a week of cautious optimism tempered by strategic positioning ahead of pivotal announcements.

The U.S. Dollar’s Mixed Movements

Last week, the greenback was caught between opposing forces, fluctuating against safe-haven currencies and riskier counterparts. Market participants have been weighing conflicting signals tied to a deceleration in U.S. inflation and expectations that the Federal Reserve might lean towards a soft landing for the economy.

The dollar’s uneven performance reflects a recalibration among traders, particularly as the personal consumption expenditures (PCE) index painted a slightly moderated inflationary picture. This bolsters the view that an aggressive hiking stance appears less likely, while the Fed may proceed with cautious rate adjustments..

In recent weeks, safe-haven demand has shown signs of competing with risk appetite. For instance, the greenback weakened marginally against traditional havens like the Swiss franc and Japanese yen, as lingering geopolitical risks and concerns over a global slowdown fuelled allocations into safer assets. On the other hand, risk-on trades saw the dollar relative to higher-yielding EM currencies fluctuate amid emerging optimism for growth stabilisation.

Since Q2 2024, we've believed that the Dollar must weaken due to many factors, including budgetary pressures, differing central bank policies, inconsistent inflation rates, and our current position in the business cycle. Recent volatility, the Global Financial Crisis residual trade (driven by cheap money) and the Magnificent Seven trade have also highlighted US asset concentration risk and the perils of the ETFs following the latter. Recently, Morgan Stanley predicted that the dollar might drop to levels not seen since the Covid-19 pandemic by mid-next year, while JPMorgan Chase & Co. maintains a negative outlook for the US currency. Moreover, Goldman Sachs Group Inc. indicated that the Trump administration's attempts to find alternative revenue sources, if tariffs face challenges, may affect the dollar even more negatively.

Based on the technical indicators, the dollar is at a critical support level, but the risk for the dollar is to the downside, in our view, with the next support at around 96.5.

Morgan Stanley calls for a forecast of 91 by May-June 2026, and while this appears technically feasible, we deem it far from a linear transition.

Dollar short positions, as reported by the Commitment of Traders Report from last Tuesday, suggest a similar downward move. According to Bloomberg, net short positions on 10 currency pairs and the Dollar index are near the highest levels seen since 2023, when the Dollar Index moved from just over 112 to just above 100. Interestingly, we are not quite at the levels seen in 2020 around the COVID-19 period. Perhaps time will tell.

What time does tell us is that there is the business cycle plays a key role in this trade and if we're talking about 91 at this time around, there is a good chance we'll be talking about a dollar index in the 70's thereafter.

Buckle up, people, until next Tuesday.....