Please download PDF for the full content

What’s next for the USD?

Middle East Geopolitical Risks

• Middle East tensions & the USD (6, 7, 8 & 9)

USD sell-off year to date

• Analysing breadth & scale of USD sell-off (11 & 12)
• Repeat of USD weakness at start of Trump’s first term (13)
• USD has peaked and remains stronger (14)
• USD diverges from short-term cyclical drivers (15)

Tariff & Fed policy uncertainty

• Trump tariffs have undermined cyclical outlook for US economy (17)
• Fed remains in wait and see mode before resuming rate cuts (18)
• More clarity on outlook and/or looser labour market to encourage rate cuts (19)
• President Trump’s criticism risks undermining Fed’s independence (20)
• Who are potential candidates to be the next Fed Chair? (21)
• Trump’s policies have increased market attention on US twin deficits (22)

US fiscal policy concerns

• “One Big Beautiful Bill” to keep deficits high while boost to growth may disappoint (24)
• Higher yields & more debt lifting total cost of debt service for US (25)
• US investors have been replacing foreign investors as holders of US Treasuries (26)
• Foreign official demand for USTs has stalled but more than offset by strong demand from private foreign investors (27)
• Section 899 of Budget Bill has raised concerns over capital war alongside tariff war (28 & 29)

Adjusting exposure to US assets & USD?

• Will the Trump administration pressure trading partners to allow their currencies to strengthen against USD? (31)
• Global rebalancing & weaker USD helped by looser fiscal policies in Germany & China to boost domestic demand. (32 & 33)
• Gold has been one of main beneficiaries from loss of confidence in fiat currencies. (34, 35 & 36)
• Foreign investors have been encouraged to pare back long US exposure and/or increase hedges to protect against further USD weakness. (37, 38 & 39)
• US exceptionalism trend in asset markets has been challenged. (40) 
• Market positioning has shifted in favour of further USD weakness. (41)

MUFG FX Forecasts

• MUFG FX Forecasts – “Room for USD to weaken further” (43)