Dollar facing headwinds as 'Brand USA' falters

Investors still see the US currency as overvalued

- SAQIB IQBAL AHMED LAURA MATTHEWS

Trade-related uncertainties, ballooning fiscal debt and weakened confidence about enduring US exceptionalism have weighed on US assets, with the dollar one casualty. Investors see the currency losing more of its lustre as the greenback comes back to earth from lofty valuations.

The Trump administration's tariffs salvo this year prompted investors to cut exposure to US assets after a long period of overperformance. While the US currency steadied somewhat in recent sessions as investors took heart from a truce in the ongoing US-China trade war, it came under renewed selling pressure after ratings agency Moody's cut the United States' pristine sovereign credit rating by one notch.

"There's plenty of room for further depreciation, purely from a valuation perspective," said George Vessey, lead FX and macro strategist at payments firm Convera. The "sell America" trade was back in focus after Moody's US credit downgrade, he said.

The US dollar index has tumbled as much as 10.6% from its January highs, one of the sharpest retreats for a three-month period, leaving speculators net short the dollar to the tune of $17.32 billion, close to the most bearish position on the buck since July 2023, according to CFTC data.

Part of the bearishness around the dollar has been due to the currency trading at a relatively rich valuation — in January trading as high as 22% above its 20-year average of 90.1 on the dollar index.