The value of the dollar faces increasing scrutiny as several economic factors converge, raising questions about its strength in the global market. A new article examines how hedging is playing out on a multi-trillion-dollar book, the outcome of which could substantially change the dollar’s course for years to come. With long-end yields rising across the globe, we believe that the dollar is under pressure. These market conditions lead many investors to reconsider, despite the appealing lure of higher yields.
Financial analysts have warned of an illusion in the making, like the US fiscal premium. The idea that the dollar is strong because of fiscal policies needs to be challenged. This is because, contrary to popular belief, investors are beginning to retreat from US assets. This change suggests that the dollar’s strength may be more precarious than we once thought. The recent threat to introduce a 50 percent tariff on European goods has only served to intensify this sentiment. A 25 percent hit on Apple iPhones would be enough to further shake the dollar’s increasing crumbling perch atop the world’s monetary edifices.
The politics of currency repatriation are changing as well. The dollar’s place within the G10 seems to be changing, as capital flows stay nearer to home. Countries like Japan, South Korea, Singapore, and Taiwan have a collective net international investment position of more than $5 trillion. This shift is sending a powerful signal that the risk-reward ratio for investing across the Pacific is heading south. Rising yields in these regions are making it even less favorable for investors.
…and Treasury bonds, particularly those at the long end, are coming under increasing pressure as fiscal optics continue to deteriorate. Investors are now seeing a more diverse set of higher-yielding alternatives, making the dollar’s outlook all the more complicated. If the dollar breaks below key lows established earlier this year, it may be looking at quick bottoms. Keep an eye out for that 99-handle low from May and the April bottom at 97.92 as important support.
“Powell’s crew faces a challenge in maintaining a mid-air posture without losing altitude or control once the tariff bill hits the CPI print and the bond market,” an analyst noted. This feeling speaks to broader alarm over the Federal Reserve’s ability to pivot as economic realities change.
The dollar remains under continued pressure against currencies such as the Chinese yuan (CNY), South Korean won (KRW) and Taiwanese dollar (TWD). That trend isn’t going to change without a major catalyst. The US-China trade war, in which outwardly Europe is caught in the crossfire. Consequently, Brussels risks a calamitous €198 billion goods gap. The tariffs, if realized, could reduce Eurozone GDP by an estimated 0.6 percentage points. They might cause stagflation here in the States.
In addition, some analysts are even expecting a “leaky lifeboat” situation in which worsening investor sentiment accelerates the outflow of more money from US assets. This perspective is underscored by concerns that the current economic landscape may be “nastier than China,” as former President Trump suggested in recent comments about trade.
White House economist Stephen Miran previously introduced the idea of “reciprocal” tariffs. This concept tremendously compounds the strictness of the circumstances. Tariffs are set to affect some of our most important sectors, across the board—including technology. Investors are understandably focused on how these changes will impact the investment landscape.