Bearish Sentiment Towards US Dollar Hits 16-Year High Amid Trade Uncertainty

Bank of America's Global Fund Manager Survey for May revealed that bearish sentiment towards the US dollar has reached its highest level since 2006. This shift in investor sentiment is largely attributed to the tumultuous trade policies under President Trump, which have dampened interest in US assets. The survey indicated a slight improvement in overall market sentiment compared to April, but it remains largely negative, suggesting a potential modest increase in what Bank of America terms the 'pain trade.'

Fund managers have reduced their cash holdings from 4.8% to 4.5%, a move typically seen as a signal of increased confidence. However, the reduction in holdings of the US dollar has reached its highest level since May 2006, reflecting a significant shift in investor strategy. Bank of America noted that 75% of the survey data was collected before the Geneva talks, indicating that the bearish sentiment predates recent developments in trade negotiations.

The US dollar has been on a steady climb, reaching near 4-week highs as optimism surrounding US-China trade talks continues to build. This progress has led to a rally in US stock futures, outperforming other global shares. Traditional safe-haven currencies, such as the yen and Swiss franc, have slipped alongside Treasuries, reflecting a fading demand for defensive assets. Meanwhile, currencies linked to China, including the Australian and New Zealand dollars, have surged alongside the yuan. The euro, however, has retreated, mirroring shifts in global sentiment.

The US and China are expected to provide further details on their trade deal following a weekend of marathon negotiations. Officials from both sides have signaled momentum, with Washington emphasizing progress toward a deal and Beijing highlighting mutual agreement to launch a formal economic and trade negotiation process. Although the situation remains fluid and uncertainty is still high, much of the fallout from Trump’s “Liberation Day” tariff announcements has been erased as the President softens his protectionist stance. This has fueled a relief rally and suppressed volatility. However, investors remain cautious, reluctant to make big bets on optimistic rhetoric without concrete steps to reduce levies, particularly between the US and China. While the tone has shifted, uncertainty persists, keeping traders on edge until clear policy moves emerge.

The dollar, which faced selling pressure earlier this year over concerns about trade policy uncertainty, has regained ground as negotiation optimism, solid economic data, and the Fed’s cautious stance on rate cuts underpin demand. As well as keeping a close eye on trade talks, US consumer inflation data on Tuesday, followed by retail sales and producer prices on Thursday, will be under the microscope as investors look for fresh signals on how the trade war has impacted the economy and when the Fed will start cutting rates again.

The euro continues to face downside pressure, retreating toward a key support region against the US dollar as US equity futures rally. Encouraging signals from US-China trade talks over the weekend have reinforced the pattern of inverse moves between risk assets and the common currency. Recent market dynamics have positioned the euro as a hedge against US policy uncertainty, benefiting from safe-haven flows when equities decline. However, with sentiment shifting toward optimism and risk appetite strengthening, the euro is likely to remain under pressure. Any further trade progress could accelerate the move, keeping the currency on the defensive.

The Eurozone’s recovery narrative is also being tested. This week’s ZEW survey and GDP data could prove pivotal. Any signs of weakening momentum could further weigh on the euro, particularly if US economic resilience comes back into focus. Investors will watch these releases closely, assessing whether the euro’s recent slide extends further or stabilizes near current levels.

A fairly hawkish Bank of England, a UK trade deal with the US and the upcoming Brexit summit all point to potentially further gains for the pound in the short term. But due to dollar resilience of late, GBP/USD continues to struggle to grip onto $1.33. GBP/EUR, on the other hand, is at a more than 1-month high above €1.18, closing the gap on rate differentials. Last week, the BoE cut interest rates by 25 basis points to 4.25%, with a vote split that saw two policymakers preferred to hold rates at 4.5%, which gave the pound a modest boost. The Monetary Policy Report revealed growth forecasts were lowered beyond this year, flagging weakening labour conditions, whilst inflation projections were revised downward, suggesting a sustained undershoot of the 2% target. Meanwhile, the UK-US trade deal was symbolic, but although it is no game changer for the outlook of the UK economy or for the pound, it has proved supportive for the British currency against safe haven peers bar the dollar. The dollar is proving to be the main beneficiary of easing trade tensions, keeping GBP/USD pinned below $1.33 for now. Looking further out though, traders are still more optimistic on the pound’s outlook versus the dollar – with options traders least bearish GBP over a 12-month time horizon since 2014. This week, we expect the official UK labour market data to show a further increase in the unemployment rate to 4.5% in March. This would be its highest level since August 2021. Wage growth is expected to moderate, with regular private sector wages slowing by to 5.7%. Moreover, headline GDP growth is projected at 0.6% in Q1, up from 0.1% in Q4. Finally, British negotiators are sitting down for a week of intensive talks with their EU counterparts as they prepare for the looming Brexit summit on May 19.