NEW YORK, May 19, 2025: Trade-related uncertainties, ballooning fiscal debt and weakened confidence about enduring US exceptionalism have weighed on U.S. assets, with the US dollar (USD) one casualty. Investors see the currency losing more of its luster as the greenback comes back to earth from lofty valuations.
The Trump administration's tariffs salvo this year prompted investors to cut exposure to U.S. assets after a long period of overperformance. While the U.S. currency steadied somewhat in recent sessions as investors took heart from a truce in the ongoing U.S.-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 U.S. 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. Currently, the index is hovering about 10% above its 20-year average level.
There is room for it to weaken significantly further, for example another 10% slide would take it to the lows touched during President Donald Trump's first term.
LONG-TERM CONCERNS
Investors and strategists have viewed the dollar as overvalued for years but betting against the currency has proved painful time and again, as the U.S. economy powered on. That could be about to change.