With the dollar trading a three-year lows, and consensus growing shorter and shorter the greenback, FX options traders appear to have hit pause on their downside bets.
Goldman Sachs Mike Cahill sees three main factors behind the bearish Dollar outlook:
First, the maelstrom of US policymaking weighs on activity and risk-adjusted return calculations, which both undermine the case for continued over-allocation to US assets. This distinction, that it is the back-and-forth of policy that matters, helps explain why the Dollar has continued to depreciate even as trade policy has trended in a softer direction.
Second, the foreign policy response has been stronger than we anticipated. This is clearest in Germany where the fiscal spending plans far exceeded expectations, but it also extends to China.
Third, we think that the design and broad application of tariffs makes it likely that US businesses and consumers will bear the brunt of tariff increases. As a result, tariffs will cut into US firms’ profits and US households’ real incomes, which have been the driving force behind ‘US exceptionalism’ and the strong Dollar.
