The Bloomberg Dollar Spot Index fell for a fifth day, down 3.3%. While U.S. Treasuries and stocks rose on news that President Donald Trump would delay tariffs on some popular consumer electronics, he warned that the exemption would be temporary, weakening sentiment for the dollar.
The prolonged sell-off in the dollar and Treasuries, often seen as a safe haven in turbulent times, has heightened concerns that investors are reducing their holdings of U.S. assets in the face of major shifts in trade policy and broader political uncertainty.
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Jordan Rochester, head of macro strategy for Europe, the Middle East and Africa at Mizuho International, said in an interview with Bloomberg TV that weakness in the dollar and Treasuries is a “terrible, toxic combination.”
The Bloomberg Dollar Spot Index closed down 0.3% on Monday. The index has fallen about 6.1% so far this year and is on track for its biggest annual drop since 2017.
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Positioning in the options market suggests traders are hedging against further declines. An index measuring three-month risk reversals for the dollar against major currencies, or the spread between calls and puts, has fallen to a five-year low.
This suggests that a weaker dollar benefits put options, while a stronger dollar benefits calls, with demand for puts greater than for calls.
The S&P 500 rose 0.8% on Monday. The 10-year Treasury yield fell 11 basis points to 4.38%. A five-day sell-off in the bond market, sparked by Trump’s trade war concerns, led to the 10-year Treasury yield’s biggest weekly gain in more than two decades last week.
Lasting damage?
The main discussion on Wall Street over the past week has been whether Trump’s actions, even if they are ultimately reversed, have caused lasting damage to the idea that the dollar and U.S. Treasuries are the ultimate risk-free assets.
“We are talking about a radical change in the market’s view of the dollar, especially during times of global financial stress,” Standard Bank strategist Steve Barrow wrote in a note to clients on Monday. “We note that the other key element of the appeal of U.S. safe assets – the U.S. Treasury market – has been less safe.”
Derek Halpenny, head of global market research at MUFG Bank, shared the same view, focusing on speeches by Trump and Commerce Secretary Howard Lutnick over the weekend that highlighted a long-term plan to impose different specific taxes on the technology industry.
“It is difficult to see any fundamental factors that could improve investor sentiment. The dollar fell below key levels last week,” Halpenny wrote in a note.
The Bloomberg Dollar Index’s one-week risk reversal indicator approached parity for the first time in five days, indicating that traders are becoming less bearish on the dollar. Still, the index remained in negative territory for the third consecutive day, with bearish sentiment on the dollar reaching its highest level since the outbreak of the epidemic.
“Trump’s actions continue to damage the ‘American brand,'” wrote Dana Malas, a strategist at Skandinaviska Enskilda Banken AB. “This means that dollar assets, both in the U.S. and abroad, should continue to carry a higher risk premium.”
Nearly 80% of respondents in a Bloomberg survey predicted the dollar would weaken further next month, the highest bearish share since the survey began in 2022.
Strategists at Wall Street’s largest banks also see the potential for further weakness.
JPMorgan analysts said investors remain bearish on the dollar, especially against the yen and euro, as the possibility of a U.S. recession remains. Mizuho Bank predicts the dollar could fall another 5% on a trade-weighted basis before rebounding, based on how the dollar traded in 2017-18 and during the pandemic.
“The design and implementation of these tariffs should be currency negative as they have already led to a decline in consumer and business confidence,” wrote Kamakshya Trivedi, an analyst at Goldman Sachs Group Inc.
“If the tariffs weigh on U.S. corporate profit margins and real incomes for U.S. consumers, as we think they will, it could undermine this exceptionalism and, in turn, undermine a core pillar of the strong dollar,” they said.
