USD: Vulnerable slide as peace hopes build – MUFG

MUFG’s Derek Halpenny argues the US Dollar is under renewed selling pressure as President Trump’s comments on resuming talks and a war being “close to over” support risk assets and lift US equities above pre-conflict levels. Positioning shows investors may capitulate on long Dollar trades, while weakening foreign demand for US Treasuries and potential curve steepening point to a softer Dollar outlook.

Peace rhetoric weighs on Dollar

"This week now looks like the period when investors begin throwing in the towel on the long dollar trade that was the most obvious initial strategy after the war began. IMM positioning data indicated broad-based US dollar buying in the period following the conflict. The US dollar index non-commercial futures position has turned from net short to net long with the long dollar position in the latest data the largest since before the Liberation Day tariff announcements at the beginning of April last year."

"The recycling of US dollars back into the US is likely about to get severely disrupted. Middle East energy sales receipts are down sharply and hence buying of US Treasuries will likely slow notably with Middle East entities potentially set to turn sellers. The Fed custody holdings of USTs held by foreign accounts have fallen sharply."

"In a seven-week period holdings are down USD 101bn, the largest total since covid, which was then the largest since 2014. The US curve is yet to steepen. If the conflict drags on without a resolution soon then inflation and fiscal risks will likely start to steepen the curve – a scenario that usually coincides with a weaker dollar."

"Tonight, the US Treasury will release the cross-border flow data (TIC) for the month of February and the more recent data has shown some easing demand for US Treasuries with private foreign investors selling in three of the last four months. Indeed foreign investor buying of USTs on a 6mth sum basis was the weakest in January since October 2021. Confidence in US assets continues to be tested and demand for US Treasuries was weakening even before the conflict began and a conflict that drags on will only further reinforce those increasing doubts."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)