Written by the Market Insights Team
Kevin Ford – FX & Macro Strategist
What’s behind dollar softness?
The last time the S&P 500 erased a 15% year-to-date decline in under six weeks was back in 1982. Yet, while equities recovered, the dollar’s rebound has been underwhelming, its one-month gain holding at a modest 1%. So, what’s keeping the dollar in check despite the market rally? And do current conditions warrant a synchronized move higher?
One factor that could have added pressure to the US dollar is the recent front-loading from US firms. Businesses paying for imports have been driving capital outflows, and while deteriorates the US current account, adds bearish pressure on the greenback as dollars leave the country.
Another key concern is confidence in US debt, which remains shaky. While there’s been policy backtracking, it hasn’t meaningfully improved the perception of US creditworthiness. International investors remain cautious. Over the past five years, increased government spending and a widening fiscal deficit have fueled skepticism around the US credit outlook. This uncertainty, reflected in the US Treasury option-adjusted spread, continues to keep investors on edge.
To add to the recent shattered confidence, US Treasury yields are rising again, reaching levels that previously triggered heightened volatility. Are bond vigilantes making a comeback? Fixed income markets seem uneasy about the upcoming bills, and a sell-off in Treasuries is also contributing to the retreat in the US dollar.
Also, there’s Stephen Miran’s Mar-a-Lago accord. Miran, who’s part of the US economic cabinet, recommended in his paper in 2024, that the US would put pressure on economic partners to strengthen their currency as part of the negotiations over how countries could avoid stiff tariff rates. This may well be the case with Asian currencies. As we’ve seen since the beginning of May, with Taiwanese dollar and Korean Won, the currencies have largely appreciated against the dollar. After Taiwan said it concluded first ‘substantive’ tariff talks with US, there was a big move in TWD which saw its biggest gains against the US dollar since 1988. And Taiwan’s central bank didn’t intervene, which is odd.
What adds to the counterintuitive recent market dynamics? As investors reassess expectations, not just for fewer rate cuts, but also for a delay in the Fed’s timeline, the global rate divergence should, in theory, make the US dollar more attractive. Major central banks, including the Bank of England and the European Central Bank, are signaling lower rates in 2025, while the Bank of Japan is holding steady at 0.5%. This contrast should reinforce support for Greenback. Yet the dollar momentum has stalled.
While we expected a stronger rebound due to the re-allocation of US equities, risk-on mode has followed a familiar pattern, equities nearing short-term overbought conditions, Treasuries selling off throughout the week, and the VIX remaining well below 20. The dollar index extended its retreat on Wednesday, slipping to 100.3 after falling from its one-month high. A softer-than-expected inflation report reinforced expectations that the Fed could still have room for rate cuts this year, applying additional pressure on the dollar. Notably, the currency’s decline has been broad-based, reflecting a shift in sentiment. Another factor behind the muted enthusiasm for the dollar amid the recent equities rebound is its composition, driven primarily by retail flows, while institutional investors and hedge funds have lagged in repositioning long US assets.
Finally, it is important to note a long-term trend. Gold allocations have been steadily rising, and not just in 2025 headlines. Major central banks have been quietly reshaping their foreign reserves for years, shifting away from the dollar. This long-term trend has gained momentum amid shifting global trade dynamics and geopolitical uncertainty, further accelerating the move.
External forces keep euro in check
George Vessey – Lead FX & Macro Strategist
Euro price action remains driven by external factors in the short term. The common currency reclaimed $1.12 yesterday, buoyed by a weaker dollar following an unexpected drop in US inflation and caution over US-China trade talks, despite a 90-day tariff truce. However, EUR/USD remains about four cents from its 2025 peak and a retest of fresh highs isn’t on the cards unless the pair closes back above its 21-day moving average at $1.1314.
In Eurozone macro news, the ZEW expectations survey rebounded in May, signalling growing optimism around economic stability, government formation, and trade progress. However, the current situation gauge failed to show any recovery, highlighting ongoing economic uncertainty. Today’s industrial production data will be a key focus, offering insight into whether momentum is building or if fragile conditions persist. Investors will watch closely for confirmation of stabilization or signs that growth risks remain elevated.
On the monetary policy front, markets have revised ECB rate expectations, now pricing the deposit facility rate at 1.71% by year-end, up from 1.67% on Friday but below April’s 1.55% levels. At the same time, traders almost fully expect a June rate cut, with odds at 85%, as policymakers seek to counter US tariff pressures on growth. ECB officials have weighed in on policy direction, François Villeroy de Galhau signaled room for another cut by summer, while Joachim Nagel struck an optimistic tone, citing a good probability that inflation will approach the 2% target.
Beyond short-term price fluctuations, the upside bias on the euro longer term remains intact. Call options on the euro versus the dollar are near their most expensive levels in nearly five years, signaling heightened demand for upside exposure. This aligns with positive non-commercial futures positioning, reinforcing a broader bullish bias in the currency. Fund managers see this as more than just a tactical trade, suggesting that the euro’s upward trajectory stems from a structural shift rather than short-term volatility.
Banxico to cut rates
Kevin Ford – FX & Macro Strategist
The Mexican peso has strengthened to 19.3 per dollar, reaching a seven-month high as a sharp pullback in the USD fuels its rebound. Latin American currencies are leading the charge, outperforming their emerging-market peers as risk-on sentiment dominates. Meanwhile, the Banco de México (Banxico) is expected to cut rates by 50 bps today.
Mexican economy growth momentum remains weak, with April’s CPI confirming that inflationary pressures in the first half of the month were temporary. We’ll be on the lookout for potential revisions to CPI and core CPI forecasts as well as growth forecasts.
Broader uncertainty and subdued business sentiment continue to weigh on the outlook, largely due to lingering questions about US trade policy and the future of CUSMA/USMCA. As the cycle unfolds, markets are likely to price the terminal rate closer to 6%.
Strong resistance at 200-day SMA
Kevin Ford – FX & Macro Strategist
While the full extent of economic damage from tariffs remains unclear, and dovish pressure on the Fed is unlikely to fade entirely, sentiment on the US dollar should keep the Loonie trading above 1.39. Meanwhile, FX options market positioning has turned neutral toward the Canadian dollar.
As previously noted, upside moves during this week have faced selling pressure near the 200-day SMA, at 1.401, evidenced again by this week’s sharp drop in USD/CAD from 1.401 to 1.395.
Further supporting a shift in sentiment, Carney’s new cabinet has reaffirmed its commitment to redirecting Canada’s economic focus away from the U.S., pledging billions toward growth initiatives. Priorities include the removal of trade barriers across the 10 provinces and targeted tax cuts to jumpstart economic revitalization. Markets have responded swiftly, with the announcement coinciding with USD/CAD’s recent decline, underscoring growing optimism for the Loonie as major fiscal spending aims to reinvigorate a struggling economy.
US Dollar eases gains, Mexican Peso hits 7-month high
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: May 12-16
All times are in ET
Have a question? [email protected]
*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quothave a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.