Weakening dollar reflects growing disinterest in ‘Brand USA'

NEW YORK: 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 luster as the greenback comes back to earth from lofty valuations. The Trump administration's tariffs salvo this year prompted investors to cut exposure to US assets after a long period of overperformance. 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's cut the US' pristine sovereign credit rating by one notch.
'There's plenty of room for further depreciation, purely from a valuation perspective,' said George Vessey, lead FX and macro strategist at payments firm Convera. The 'sell America' trade was back in focus after Moody's US credit downgrade, he said.
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 US$17.32 billion (RM74 billion), close to the most bearish position on the buck since July 2023, according to CFTC data.
Part of the bearishness around the dollar has been due to the currency trading at a relatively rich valuation – 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's first term.
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.
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.
'The dollar weakness story is not over,' said Englander. Investors are also concerned about the long-term fiscal picture for the US. Analysts say Trump's sweeping tax-cut bill would add US$3 trillion to US$5 trillion to the nation's US$36.2 trillion in debt over the next decade.
'The 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,' George Saravelos, global head of FX research at Deutsche Bank, said in a note.
The Trump administration has said it backs a strong-dollar policy.
'President Trump has been unequivocally clear about maintaining the strength and power of the US dollar as the world's reserve currency,' White House spokesman Kush Desai said.
Despite recent foreign selling, years of US asset appreciation mean the world still holds trillions in US equities and Treasuries.
Such selling pressure could come from various corners of the globe as more people zero in on the dollar's recent failure to act as a haven, investors said.
'That's really what gave people a jolt ... and say 'Well, if the dollar is no longer acting as a safe-haven currency, if it's not diversifying us any longer, should we really be holding this much of it?'' said Peter Vassallo, FX portfolio manager at BNP Paribas Asset Management.
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, 'it hasn't turned into people selling dollars, assets or equities or Treasuries to repatriate yet.' That could still follow, he said.
The dollar's strength over the last decade had let market participants hold US assets without worrying too much about currency risk.
With foreign holdings of US assets in trillions of dollars, per estimates from banks including Deutsche Bank, even a modest rise in hedge ratios – the portion of foreign currency exposure that is protected – could spell significant selling.
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's currency in early May showed investors how a scramble out of the US dollar could roil markets.
Eurizon SLJ Capital's Stephen Jen and Joana Freire said in a note in early May that USD hoardings of about US$2.5 trillion by Asian exporters and institutional investors 'pose sharp downside risks to the dollar vis-à-vis these Asian currencies.' – Reuters

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