The US dollar, once the undisputed king of currencies, may be losing its luster.
While the greenback is expected to retain a significant portion of its strength in the coming months, a Reuters survey reveals a growing sense of unease among currency strategists, as a once-crowded dollar trade begins to thin out amid policy uncertainty.
Fueled by erratic policy pronouncements and escalating trade tensions, the dollar is facing mounting headwinds.
President Trump has initiated a trade war with America’s three largest trading partners, imposing 25% tariffs on traditional allies Canada and Mexico, in addition to implementing import duties on goods from China.
These aggressive trade tactics, combined with weeks of speculators unwinding near-decade high net-long dollar positions, have already taken a toll on the currency.
Data from the Commodity Futures Trading Commission reveals that the greenback has fallen nearly 2.5% against a basket of major currencies this week.
The Reuters survey, conducted between March 3-5, reveals a growing sense of pessimism surrounding the dollar’s prospects.
A near-60% majority of currency strategists (18 of 31) predict that net-long dollar bets will decline further by the end of March.
Eight respondents anticipate little change, while only five expect an increase in net long positions.
The euro factor
Responses to the latest FX poll were collected both before and after the latest tariff announcements.
The euro also experienced a surge following news that parties hoping to form Germany’s next government agreed to create a 500 billion-euro ($534.75 billion) infrastructure fund and overhaul borrowing rules to revamp the military and revive growth in Europe’s largest economy.
This shift in German fiscal policy could have an impact on the long-term dollar trend.
A two-sided coin
“The risks to the dollar outlook over the next few months are even-sided,” said George Saravelos, head of FX research at Deutsche Bank.
On the one hand, tariffs and elevated geopolitical uncertainty support a stronger dollar. On the other hand, shifts in German fiscal policy and the disruption across multiple fronts pose downside risks. We are therefore neutral.
Saravelos concludes that “The large degree of uncertainty will prevent a large rise in dollar positioning in both directions.”
Euro’s outlook: a forecast for weakness
Despite its recent gains, the euro, currently trading at $1.07 and up nearly 3% against the dollar since early-Monday, was expected to fall to $1.03 in three months and trade at $1.04 in six, according to survey medians.
However, these forecasts remain roughly the same as in a February survey, suggesting that they may soon be revised to reflect the changing economic landscape.
From October to early January, the dollar surged nearly 10% on continued resilience in US economic data and expectations that the Federal Reserve had only one or two more interest rate cuts left to deliver.
However, the dollar has since fallen about 5%, with a majority of those losses occurring in the last few weeks based on signs of economic weakness, leading to interest futures pricing three Fed rate reductions by year-end.
“The world is long US assets to a degree it has never been before and if they get scared of being on those assets, that will be the single biggest driver of dollar weakness going forward,” Kit Juckes, head of FX strategy, at Societe Generale, told Reuters.
Juckes further suggested his “biggest underlying concern with the dollar is that even after so many years of exceptionalism that have taken it to levels it hasn’t seen since 1985 in real effective terms, it only takes a few chinks in the armor for it to look weaker.”
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