Bearish Dollar Bets Hold Steady Amid Policy Crosswinds and Tariff Pressures

The U.S. Dollar Index (DXY) has staged a modest rebound in recent weeks, climbing back toward the 102.00 level after sliding to near 98.00 in early 2025. Yet beneath the surface, traders remain stubbornly bearish on the greenback, betting that structural forces—from protectionist policies to Fed policy missteps—will keep downward pressure on the dollar.

The Fed’s Dilemma: Rate Cuts vs. Inflationary Tariffs

Federal Reserve policymakers face an impossible choice: cut rates to cushion the economy from President Trump’s sweeping tariffs, or risk a resurgence in inflation.

The Fed has held rates steady at 4.25%-4.50% since late 2024, but traders now price in 100 basis points of cuts by year-end. This divergence is fueling dollar pessimism. “The Fed is trapped,” says JPMorgan strategist Michael Feroli. “Tariffs are inflating input costs while stifling demand—a perfect storm for a weaker dollar.”

Trade Wars and the Erosion of Dollar Hegemony

Trump’s tariffs—now averaging 16.5% on imports—have triggered a cascading effect. The Tax Foundation estimates U.S. households will bear an extra $1,900-$4,700 annually in costs, while S&P 500 profits face a 2-3% drag.

Central banks are voting with their wallets: the dollar’s share of global reserves has fallen to 58% from 60% in 2024, with inflows to the euro and yuan accelerating. “The dollar’s safe-haven status is crumbling,” warns Deutsche Bank’s George Saravelos. “Investors now see policy chaos, not economic strength, as the dollar’s defining trait.”

Technicals Confirm Bearish Bias

Despite the recent rebound, technical indicators remain bearish. The DXY’s 200-day moving average (near 100.50) acts as a magnet for sellers, while momentum oscillators like the RSI remain in oversold territory. A breakdown below 99.00 could target the 2023 lows near 95.00.

Traders are also noting divergences: while the DXY recovers, the euro’s rise (EUR/USD at 1.1100) and yen rebound (USD/JPY below 145) reflect broader dollar weakness. “This isn’t a sustainable rally,” says Société Générale’s Kit Juckes. “Traders are using rebounds to add shorts.”

The Bear Case: Structural Shifts

Analysts at Goldman Sachs project the DXY will fall to 92-95 by 2027, citing:
- Trade deficits: The current account deficit is widening to 3.5% of GDP as tariffs disrupt supply chains.
- Fiscal strains: The deficit could hit $2.5 trillion by 2026, pressuring yields and the currency.
- Geopolitical fragmentation: A multipolar world is reducing demand for the dollar as a reserve asset.

Even optimists acknowledge risks: “Even if the Fed cuts rates, the dollar’s structural decline is inevitable,” says Bank of America’s Athanasios Vamvakidis. “The era of U.S. economic dominance is over.”

Conclusion: Short-Term Volatility, Long-Term Decline

While the DXY’s near-term rebound reflects Fed rate-cut uncertainty and geopolitical noise, the underlying narrative remains bearish. With tariffs worsening inflation, central banks diversifying reserves, and the Fed cornered between growth and price stability, the dollar’s decline appears inexorable.

Investors clinging to bearish bets are justified in their skepticism: the DXY’s 2025 low of 98.00 is likely just the start. By 2027, a dollar at 92-95—levels not seen since the early 2000s—looks increasingly probable. Traders would be wise to remember: in a world of rising protectionism and fading U.S. dominance, the greenback’s era of supremacy is ending.