Written by the Market Insights Team
Key shifts in the dollar’s path
Kevin Ford – FX & Macro Strategist
Where’s the US dollar headed next? To put it simply, for decades, its movement has largely hinged on two forces, global growth cycles and Federal Reserve (Fed) tightening. Before the financial crisis, strong global expansion fueled risk-taking, drawing capital away from the U.S. The BRICS era amplified this trend as investors sought international assets. Meanwhile, Fed rate hikes have consistently shaped dollar dynamics. But today, shifting portfolio flows and unexpected asset allocation patterns suggest it’s time to rethink this traditional framework.
Lately, worries about US asset safety, especially long-term bonds, have gained traction. Over the past decade or so, the “U.S. exceptionalism” era saw heavy global investment in American equities, fixed income, and ETFs. Now, international players are pulling back. While this isn’t a full retreat from the dollar, it hints at a strategic shift in portfolio management as exposure to US assets is intentionally trimmed, a cautious recalibration by major institutions.
Several forces are reshaping investor sentiment. Tariffs have unsettled confidence, while speculation swirls about China offloading treasuries. In reality, China has simply reduced its purchases over the years, diversifying its holdings. The bigger moves, however, are coming from traditional allies, Canada and Europe, whose treasury investments eclipse China’s. Their retreat from US assets isn’t abrupt but rather a measured shift driven by multiple factors, including hedging strategies. This transition isn’t easily seen in the data, as institutional investors are hedging US exposure rather than dumping portfolios outright. Instead of bulk selling, they sell USD forward while buying CAD or EUR forward. Then, they gradually fine-tune their positions to trim underlying dollar-denominated asset exposure. Is this trend coming to an end? Tough to say, but the relentless slide in the US dollar over the past four months largely traces back to heavy futures market selling by key US trading partners. Their positioning suggests a deeper recalibration rather than just short-term fluctuations, hinting at broader shifts in global portfolio strategies.
What could influence the dollar’s trajectory in the coming weeks?
- Section 899 tax provision. Investor focus is locked on the House tax bill, which appears to raise rates on US assets linked to nations imposing ‘unfair foreign taxes.’ This could translate into higher withholding taxes on US-sourced interest, dividends, and FDAP income, potentially climbing to 20%, adding another layer of pressure to the already bearish sentiment surrounding the dollar.
- The evolving fiscal backdrop remains a key factor, amplifying doubts about the dollar’s stability. While historically stimulus efforts fueled risk asset rallies and supported the USD, sentiment is shifting. Investors are growing increasingly wary of persistent deficits, which now inject an added dose of unpredictability into market dynamics.
- Front-loading effect. Recent import payments have fueled capital outflows, straining the U.S. current account and weighing on the dollar. This intensified selling pressure has contributed to its recent weakness. However, as payment cycles normalize, this trend is expected to reverse in Q2, potentially easing downward pressure on the currency.
Euro bulls charge amid U.S. woes
Antonio Ruggiero – FX & Macro Strategist
With renewed trade tensions weighing on U.S. sentiment, the euro surged to its highest level since late April, when EUR/USD briefly broke above $1.15. Yesterday, the pair reached an intraday high of $1.1450, driven by disappointing U.S. PMI data—where the manufacturing index contracted further, slipping from 48.7 to 48.5 in May.
The resurgence in bullish momentum saw hedge funds reinstating aggressive bets on euro strength, reversing last week’s trimming of topside bullish bets as optimism had faded. However, on a one-month horizon, sentiment remains subdued, with today’s risk reversal levels still below the one-month average. Trump’s latest tariff threat—doubling levies on steel and aluminum to 50%—has drawn swift criticism from the European Commission, which warned that it undermines efforts to resolve the dispute. With a July 9 deadline looming, the EU has signaled it is prepared to retaliate if an agreement is not reached.
EU trade chief Maros Sefcovic will meet U.S. Trade Representative Jamieson Greer in Paris on Wednesday, while a separate Commission delegation heads to Washington for continued discussions.
Looking ahead, market participants are closely watching JOLTS data tomorrow and Friday’s NFP release, as these could further reinforce the string of weak U.S. economic prints from the past week. Given that U.S. news flow remains the key driver of euro strength, EUR/USD could end the week above $1.14, as bearish euro-specific drivers—such as the ECB rate cut and soft Eurozone CPI—appear to be largely priced in.
Banxico remains dovish
Kevin Ford – FX & Macro Strategist
Banco de México (Banxico) last week released the minutes of its May 15 monetary policy meeting, where the board unanimously decided to cut the reference rate by 50 basis points for the third consecutive time, bringing it to 8.50%. The board’s stance remains dovish, anticipating that economic slack will ease inflationary pressures.
The minutes reinforce signals that further cuts could follow despite rising inflation, with policymakers citing expectations of weaker economic growth. The board’s forward guidance suggests continued monetary policy adjustments at a similar pace. Officials appear confident that disinflation will resume amid slowing economic activity, while Q2 growth is expected to soften as temporary Q1 drivers fade.
Reflecting Mexico’s broader economic challenges, its manufacturing PMI painted a similarly bleak picture yesterday. The index edged up from 44.8 in April to 46.7 in May, according to S&P Global, but remained in contraction for the 11th consecutive month.
Manufacturers continued to struggle with pressure on both supply and demand, with new orders declining for the 11th straight month, partly due to U.S. tariffs. Export activity saw its sharpest drop since early 2021, while purchasing slowed at the fastest rate since late 2020, underscoring lingering concerns over weak demand.
Eying fresh 2025 highs
George Vessey – Lead FX & Macro Strategist
Sterling’s price action at the start of the week has been reminiscent of April in that it is being driven mostly by external pressures and FX flows and hence EUR/USD’s surge higher has dragged GBP/EUR towards €1.18 but pushed GBP/USD back above $1.35. The dollar continues to struggle when trade tensions escalate, and early signs point to renewed pressure as geopolitical uncertainties resurface at the start of the week.
The pound has logged four consecutive monthly gains against the dollar, fueling prospects for further upside – especially if investors persist in scaling back dollar exposure amid US policy uncertainty. A move toward $1.40 in the second half of this year remains on the radar, provided macroeconomic conditions align favorably. Key drivers will likely include shifts in rate expectations, geopolitical developments, and broader risk sentiment.
On Monday, UK manufacturing PMI for May was revised up to 46.4 from an initial estimate of 45.1, slightly improving on April’s 45.4 reading. Despite this adjustment, however, the sector continued to struggle with challenging operating conditions. Weak global demand, volatile trading environments, and rising costs weighed on production, new orders, export business, and employment. Final services and composite PMI numbers are due tomorrow.
In terms of positioning – CFTC data indicate hedge funds remain long on the pound, edging closer to year-to-date highs. Meanwhile, real-money investors, though still net short, have eased their bearish stance to the most balanced level since November. Overall, there appears to be room for building pound long positions, with no signs of immediate exit pressure across the board.
US Dollar DXY hovers around 99
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: June 2-6
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 quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
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