The Dollar completes a rebound, returning to a long-term decline

The US dollar reinforced the importance of support, bouncing early in the week from levels near 98.7. The dollar has been bought out of this area for the past seven weeks, preventing the dollar from rewriting three-year lows. The dollar was oversold, and we regarded the rise as a technical bounce.

The 50-day moving average acted as a stop to the rebound, emphasising its technical nature. Fundamentally, the de-escalation of the US trade conflict with the European Union stopped the ‘sell America’ trade. The Court’s ruling on the illegality of reciprocal tariffs lifted USD to the highs of the previous ten days. Lower tariffs reduce the risks of the US economy stagflation, as fiscal stimulus will boost GDP, and inflation will remain under Fed control. This scenario could still materialise, restoring interest in the depreciating US dollar and lagging equities.

But so far, the market has not gone above the 50-day moving average, bumping up against an appeals court decision to put tariffs back in place for the duration of the litigation. History suggests that a further renewal of the lows usually follows a rebound after a strong dollar decline. Therefore, one should be prepared for further drawdown of the dollar index to 95 (consolidation of early 2022) or even 89-90 (pivot area of 2018 and 2021).

We can only consider a failure to 80, which was last seen in 2014, if serious problems in the US economy force the Fed to ease rates combined with optimism in other parts of the world, which would be a repeat of the situation of the early 2000s.

That said, we remain fearful of the unlikely scenario of selling pressure on US bonds due to distrust in Washington’s fiscal policy. We are much more optimistic about the chances of a managed USD weakening due to a looser Fed policy than its peers, simultaneously depreciating nominal debt and boosting economic growth due to less traction in savings.