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\nWith foreign holdings of US assets in trillions of dollars, per estimates from banks, including Deutsche Bank, even a modest rise in hedge ratios could spell significant selling <\/p>\n
Trade-related uncertainties, ballooning fiscal debt and weakened confidence about enduring US exceptionalism have weighed on US assets, with the dollar one casualty. Investors see the currency losing more of its lustre as the greenback comes back to earth from lofty valuations. The Trump administration\u2019s tariffs salvo this year prompted investors to cut exposure to US assets after a long period of overperformance.<\/p>\n
While the US currency steadied somewhat in recent sessions as investors took heart from a truce in the ongoing US-China trade war, it came under renewed selling pressure after ratings agency Moody\u2019s cut the United States\u2019 pristine sovereign credit rating by one notch.<\/p>\n
\u201cThere\u2019s plenty of room for further depreciation, purely from a valuation perspective,\u201d said George Vessey, lead FX and macro strategist at payments firm Convera. The \u201csell America\u201d trade was back in focus after Moody\u2019s US credit downgrade, he said.<\/p>\n
The US dollar index has tumbled as much as 10.6% from its January highs, one of the sharpest retreats for a three-month period, leaving speculators net short the dollar to the tune of $17.32bn, close to the most bearish position on the buck since July 2023, according to CFTC data.<\/p>\n
Part of the bearishness around the dollar has been due to the currency trading at a relatively rich valuation \u2014 in January trading as high as 22% above its 20-year average of 90.1 on the dollar index. Currently, the index is hovering about 10% above its 20-year average level. There is room for it to weaken significantly further, for example another 10% slide would take it to the lows touched during President Donald Trump\u2019s first term.<\/p>\n
Long term concerns<\/strong> Steve Englander, head of global G10 FX Research at Standard Chartered in New York, said that while recent trade arrangements might calm markets some, they do not address long-term confidence issues facing the US.<\/p>\n \u201cThe dollar weakness story is not over,\u201d said Englander. Investors are also concerned about the long-term fiscal picture for the United States. Analysts say Trump\u2019s sweeping tax-cut bill would add $3tn to $5tn to the nation\u2019s $36.2tn in debt over the next decade.<\/p>\n \u201cThe combination of diminished appetite to buy US assets and the rigidity of a US fiscal process that locks in very high deficits is what is making the market very nervous,\u201d George Saravelos, global head of FX research at Deutsche Bank, said in a note.<\/p>\n The Trump administration has said it backs a strong-dollar policy.<\/p>\n \u201cPresident Trump has been unequivocally clear about maintaining the strength and power of the US dollar as the world\u2019s reserve currency,\u201d White House spokesperson Kush Desai said.<\/p>\n Foreign holdings<\/strong> Such selling pressure could come from various corners of the globe as more people zero in on the dollar\u2019s recent failure to act as a haven, investors said.<\/p>\n \u201cThat\u2019s really what gave people a jolt … and say \u2018Well, if the dollar is no longer acting as a safe-haven currency, if it\u2019s not diversifying us any longer, should we really be holding this much of it?\u2019\u201d said Peter Vassallo, FX portfolio manager at BNP Paribas Asset Management.<\/p>\n Colin Graham, head of multi-asset strategies at Robeco in London, however, said that while there had been a rebalancing of portfolios where people wanted to cut risk, \u201cit hasn\u2019t turned into people selling dollars, assets or equities or Treasuries to repatriate yet.\u201d That could still follow, he said.<\/p>\n Unhedged risk<\/strong> With foreign holdings of US assets in trillions of dollars, per estimates from banks, including Deutsche Bank, even a modest rise in hedge ratios \u2014 the portion of foreign currency exposure that is protected \u2014 could spell significant selling.<\/p>\n Increased hedging by investors means less direct demand for the dollar and more dollar selling pressure in the forward markets. Asian economies including China, South Korea, Singapore and Taiwan have accumulated massive USD exposure as a result of a decades-long trend of investing big trade surpluses in US assets. An unprecedented two-day surge in Taiwan\u2019s currency in early May showed investors how a scramble out of the US dollar could roil markets.<\/p>\n Eurizon SLJ Capital\u2019s Stephen Jen and Joana Freire said in a note in early May that USD hoardings of about $2.5tn by Asian exporters and institutional investors \u201cpose sharp downside risks to the dollar vis-\u00e0-vis these Asian currencies.\u201d<\/p>\n One counter-argument to the bearish dollar story, however, is the resilience of the US economy.<\/p>\n Should economic growth surprise on the upside, it could keep the US Federal Reserve on hold for longer and support the buck.<\/p>\n Jack McIntyre, portfolio manager at Brandywine Global, noted that US consumers have remained resilient so far in the face of bets on weakness. Still, he and others were more inclined to sell rallies in the dollar than bet on a rebound.<\/p>\n \u201cThe story is more kind of looking for opportunities to sell dollars on strength right now,\u201d McIntyre said. \u2014 Reuters\n<\/p>\n Related Story<\/p>\n
Investors and strategists have viewed the dollar as overvalued for years but betting against the currency has proved painful time and again, as the US economy powered on. That could be about to change.<\/p>\n
Despite recent foreign selling, years of US asset appreciation mean the world still holds trillions in US equities and Treasuries.<\/p>\n
The dollar\u2019s strength over the last decade had let market participants hold US assets without worrying too much about currency risk.<\/p>\n
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