Dollar Weakens 6% as Traders Remain Bearish Despite Market Surge

Despite the recent surge in the U.S. stock market and the diminishing talk of a recession, the sentiment among currency traders remains bearish on the U.S. dollar. Strategists from Morgan Stanley and Deutsche Bank both predict that the dollar will continue to weaken, while option traders' negative sentiment has reached its highest level in five years. The dollar index remains near its April lows, indicating that while other markets have been buoyed by easing trade tensions, foreign exchange investors are still cautious about re-entering the market.

The volatility in the market has persisted for some time, with the dollar falling 6% against a basket of currencies this year. Many believe that U.S. policymakers remain unpredictable and difficult to forecast, which has dampened the dollar's appeal. Additionally, despite Washington's denials, some investors still suspect that the Trump administration is deliberately devaluing the dollar to bolster U.S. manufacturing.

“The notion of American exceptionalism is gradually fading, and this trend is likely to continue for some time,” said Kamakshya Trivedi, global head of foreign exchange at Goldman Sachs Group this week. Valentin Marinov, G-10 foreign exchange strategist at Crédit Agricole, noted that while the “sell America” trade may have lost some of its momentum, the market remains uneasy. He described investors' feelings towards the dollar as “love-hate.”

Bets on the dollar's decline over the next year have reached their highest level since 2020, according to the options market. These long-term options are typically used by asset management firms rather than short-term speculators, further supporting the view that the market is undergoing a broader reassessment of its dollar exposure.

Meanwhile, President Donald Trump's Middle East trip and mild inflation data have fueled optimism in the tech sector, driving the S&P 500 index up 4.5% this week. However, the dollar, which had risen 1% on Monday due to easing trade tensions, gave back most of its gains later in the week.

Peter Kinsella, head of foreign exchange strategy at Union Bancaire Privee Ubp SA, believes that the dollar's underperformance relative to the stock market “indicates that international investors are not buying into Trump's American exceptionalism.” Erik Nelson, a macro strategist at Wells Fargo, however, thinks that more signs of structural slowing in the U.S. economy will be needed to drive the dollar further down. He said, “I am trying to keep a very open mind in this market because the dollar's performance in April was quite erratic.”

George Saravelos, global head of foreign exchange strategy at Deutsche Bank, pointed out that inflows into U.S. assets have been slowing, and regions are requiring banks to review their risk management agreements for investments in the U.S. All of these factors point to a decline in the purchase of U.S. Treasuries, the global safe-haven asset.