Currency trader positioning is turning bearish on the dollar and becoming more bullish on the currencies of major U.S. trading partners as the United States prepares to launch a multinational trade war. A new round of tariffs is set to take effect on Wednesday.
Moreover, risks around efforts by Washington to devalue the dollar as a complement to tariff policy or as a cudgel to compel compliance are rattling domestic and global investors who have suddenly turned bearish on the greenback.
The dollar enjoyed a burst of confidence starting in October when talk of U.S. tariffs accelerated. This spurt peaked in January when currency traders began positioning themselves for dollar erosion against the currencies of the major trading partners—the euro, Japanese yen and British pound—while maintaining bearish sentiment toward the smaller trading partners more likely to be hurt by the loss of trade.
The erosion of confidence in the dollar versus the major economies is seen in the euro. The EU economy is second only to China as the largest U.S. trading partner.
From late October until the first week of March, the majority of euro positioning was long the dollar. But for three weeks now, net positioning is long the euro.
In our view, this shift occurred just as the EU and the U.K. took steps to increase military and infrastructure spending while confidence in U.S. institutions began to erode.
Between the threat of tariffs and the risk of increased inflation and slower growth, there are threats to the liquidity of the international financial system.
In the near term, currency traders need to consider the potential of a near-term impasse over the U.S. debt ceiling. And in the longer term, there is the potential for U.S. tariffs on international financial transactions.
Read more of RSM’s insights on the economy and the middle market.
