Written by the Market Insights Team
Dollar’s slide extends as fiscal fears deepen
Antonio Ruggiero – FX & Macro Strategist
The US dollar index (DXY) extended its losing streak for a third consecutive session, falling to 99.7 on Wednesday. The combination of Moody’s downgrade and the lackluster reception of a proposed tax cut bill in Congress has revived “Liz Truss-style” fears around the US fiscal outlook, pushing long-term yields higher. On top of that, a quiet data week has added to the bearish tone, as traders latch onto the downward momentum in the USD to avoid missing out, reinforcing the selling pressure.
The recent spike in oil prices, triggered by worsening conflict in the Middle East, lifted traditional safe havens like gold—up nearly 4% week-to-date—but had a muted impact on the dollar. This divergence further confirms the ongoing USD sell-off, with most major FX pairs now retracing back to levels seen before last week’s US-China trade truce.
Unless investor confidence in the US outlook is meaningfully restored, it’s hard to see a strong bullish impulse for the dollar in the near term. A key catalyst would be clearer policy direction: most recent trade agreements remain temporary and loosely defined—subject to revision or cancellation by the US administration. With critical dates approaching—July 9 for the broader tariff plan and August 12 for China-specific measures— and no clear next steps, the policy uncertainty continues to dampen sentiment.
Meanwhile, across the Atlantic, improving ties between the UK and EU are helping to fuel a broader risk-on rally. Equity markets across the eurozone are up around 10% month-to-date, partly driven by renewed optimism following the recent EU-UK summit and its focus on a potential security and defense pact. This builds on momentum already supported by Germany’s earlier fiscal expansion, which had given the sector a notable boost.
As a result, the dollar is coming under pressure from two reinforcing dynamics: the “Sell America” trade—spurred by domestic policy uncertainty and fiscal concerns—and a growing risk-on sentiment. The latter, even under typical market conditions, tends to weigh on the USD as investors rotate into higher-beta assets abroad.
The CAD around US elections
Kevin Ford – FX & Macro Strategist
A year after Donald Trump’s 2016 victory, the Canadian dollar strengthened ~4% against the U.S. dollar. Today, after the 2024 election, CAD is practically flat, though many expect a similar drop. But the macro backdrop is vastly different; tariffs are higher, business uncertainty is deeper, and Canada’s economy appears to be bottoming out. In contrast, 2016 saw the start of an expansion cycle, the BoC starting rate hikes from 0.5% to 1.75% by 2018, and a stronger global growth outlook. Now, prolonged tariffs could add pressure to the labour market, though much may already be priced in as demonstrated by CAD weakness through the second half of 2024. Could the currency be set for another leg down, this time driven by dollar bearishness? What could limit a similar path?
Although the CAD has benefited from US dollar weakness, its beta is the lowest amongst G10 peers. Also, CAD net non-commercial positioning in the futures market, even though has improved, remains short, limiting advances beyond the 1.38 level.
And perhaps most critically, the Loonie won’t see real gains until the Fed abandons its ‘higher for longer’ stance, which has kept yield differentials between the two countries at historic highs.
Euro strength builds
Antonio Ruggiero – FX & Macro Strategist
EUR/USD is up 1.5% so far this week, driven predominantly by a deteriorating US outlook. However, sentiment has also been buoyed by the outcome of the EU-UK summit, which delivered a modest but symbolically important boost to the common currency. The substance of this week’s UK-EU agreement remains limited—likely confined to sector-specific arrangements—but the optics suggest a renewed alignment between the two economies.
In the current “Sell America” narrative, this symbolic partnership is seen as a counterweight to US-driven fragmentation. It supports domestic assets and has helped push the euro past its 21-day moving average, with the currency now eyeing a potential 10% year-to-date gain.
Further EUR upside would benefit from more domestically anchored momentum—particularly improved growth prospects in both the UK and euro area. This would reduce reliance on USD weakness and build a more durable appreciation path, rather than one purely supported by bearish sentiment toward the dollar. Still, a more pronounced and formal de-escalation in US-EU trade tensions is likely needed for the euro to break significantly higher. The eurozone’s macro backdrop remains soft, and the ECB is yet to adopt a convincingly less dovish stance.
Attention is now on today’s PMI prints for Europe and the German IFO business climate index. Consensus points to improvements across services, manufacturing, and composite indicators for May—momentum that could help solidify the bullish narrative.
Sharp bounce in retail sales
Kevin Ford – FX & Macro Strategist
March retail sales delivered a stunning surprise for the Mexican economy, soaring from -1.1% to 4.3%, the sharpest growth rate since November 2023, fully reversing the previous month’s decline. Gains were broad-based, with notable increases in vehicle services (+1.8%), textiles, jewelry, clothing, and footwear (+0.8%), health products (+5.9%), stationery (+10.4%), and vehicle-related items (+6.6%).
However, the Peso edged lower yesterday as market jitters resurfaced over US credit concerns. Still, with a 7% year-to-date gain against the US dollar, it remains a top performer among Latam currencies, alongside the Brazilian real.
Dollar index down 1.4% this week
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: May 19-23
All times are in ET
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*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.
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