Written by the Market Insights Team
What’s behind dollar softness?
Kevin Ford – FX & Macro Strategist
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 be adding pressure to the US dollar is the recent front-loading from US firms. Businesses paying for imports are 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.
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 re-allocation of US equities, risk-on mode has behaved traditionally with equities close to short-term overbought conditions and treasuries selling-off throughout the week. 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, adding some pressure on the dollar. Notably, the currency’s decline has been broad-based.
Also, 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.
US growth signals mixed
George Vessey – Lead FX & Macro Strategist
Further dampening dollar demand towards the end of the week was a batch of US data misses. April retail sales showed that pre-emptive buying ahead of tariffs faded, following March’s spending surge. Meanwhile, subdued PPI suggests that companies are absorbing higher costs, though this may not be sustainable.
April retail sales growth decelerated, with the value of purchases rising just 0.1%, unadjusted for inflation. Seven out of 13 categories saw declines, signaling broad-based weakness as the prior March spending surge faded. Meanwhile, prices paid to US producers unexpectedly declined in April by the most in five years. PPI components imply a modest 0.1% m/m increase for the core PCE deflator, the Fed’s preferred inflation gauge. Portfolio management fees plunged 6.9% m/m, while medical services softened relative to CPI, reinforcing expectations that the Fed could resume rate cuts later in the year. Yet, sharp revisions to the upside from the previous two PPI prints cloud the outlook.
Elsewhere, manufacturing surveys from the Empire State and Philadelphia Fed signaled worsening business conditions but higher new orders, hinting at slight expansion despite pricing pressures. These surveys point to a potential rise in the ISM manufacturing PMI for May, with higher raw material costs projected in the months ahead.
Euro consolidates around $1.12
George Vessey – Lead FX & Macro Strategist
Although EUR/USD remains largely at the mercy of US risk sentiment, we had some notable data out of Europe this week, which has arguably helped the pair recover ground back above the $1.12 handle, though still down four weeks in a row and 1% month-to-date.
Eurozone industrial production grew 4.7% in Q1, the strongest outside of the post-lockdown rebound in 2020, boosting 0.4% GDP growth. A key driver was US frontloading of European goods ahead of Trump’s tariffs, particularly in pharmaceuticals, where production rose 23.2% – notably in Ireland, a key hub. However, with Liberation Day tariffs now in effect, demand for Eurozone exports is set to weaken, casting doubt on whether this surge is sustainable. The ECB’s dovish stance combined with trade uncertainty may weigh on sentiment, keeping the euro’s upside in check despite recent strong data.
A cautious recovery trend compared to late 2024 could emerge once uncertainties ease and inventories normalize, but don’t expect first-quarter momentum to hold. That said, the euro’s upside hinges largely on dollar weakness, especially with the growing disconnect between price action and underlying fundamentals. Without negative USD catalysts, sustained euro strength remains questionable, particularly as ECB policy remains dovish and trade uncertainties persist.
UK data dump supports pound
George Vessey – Lead FX & Macro Strategist
After falling to a 4-week low earlier in the week, the British pound edged higher after a string of UK data and improving global risk sentiment supported sterling demand. GBP/USD is back above the $1.33 handle, flirting with its 21-day moving average as it attempts to resume its uptrend. GBP/EUR is also hovering near a key moving average around the €1.19 mark, up 0.5% this week, though still down 1.7% year-to-date.
On the data front, UK Q1 GDP growth surprised at 0.7%, well above Q4’s 0.1%. March’s 0.2% expansion reinforced momentum, with exports hitting a two-year high – though this data predates Liberation Day tariffs. Labour market data paints a mixed picture. Wage growth remains strong, up 5.6% y/y, but is plateauing, raising concerns about affordability for businesses. Employment held steady at 75.0%, while unemployment ticked up to 4.5%, suggesting hiring challenges persist. Vacancies fell to 761,000, continuing a downward trend. But the solid GDP print and sticky wages suggest the BoE may delay rate cuts, with traders now eyeing August for policy shifts.
Looking ahead for the pound, bullish GBP sentiment is at a five-year high, with one-month GBP/USD risk reversals climbing. Options pricing reflects growing confidence, while speculation around Trump favouring a weaker dollar has pushed one-year GBP/USD risk reversals to 2009 levels. Further sterling strength stems from UK-EU ties ahead of next week’s summit, expected to unveil economic reforms that could boost growth and influence BoE expectations.
Stocks and yields extend rally
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: May 12-16
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