Bank of America maintains a bearish outlook on the dollar, despite a temporary truce between the U.S. and China. The recent rise in the dollar is viewed as tactical and not indicative of long-term improvement, with challenges still facing the currency.

Uncertainty in policies persists, with the pause in trade tensions considered short-lived. Policy directions remain unpredictable, which could lead to renewed volatility as deadlines and tariff suspensions conclude.

Us Economy Slows Down

The U.S. economy is experiencing slower growth compared to pre-trade war levels. This is due to delayed investments and reduced business confidence, contributing to an ongoing economic drag.

The current account surplus in the U.S. is shrinking, reducing investment inflows and weakening support for the dollar. Institutional investors are reassessing their exposure to U.S. assets, potentially leading to continued capital outflows.

Fiscal uncertainty presents risks related to long-term Treasury issuance and inflation expectations. The Trump administration’s preference for lower interest rates and a softer dollar perpetuates depreciation pressures over the long term.

Bank of America views these structural forces, including weak capital inflows and policy uncertainties, as continuing to push the dollar down over the medium term.

Short Term Adjustments

Given the context above, it’s fairly clear that monetary positioning remains in flux, and what we’ve seen lately isn’t a trend reversal but a pause in a broader directional move. The short bump in the dollar’s strength seems tied to short-term positioning adjustments, possibly driven by temporary optimism surrounding trade discussions rather than anything more lasting. The dollar’s recent uptick, then, lacks the kind of solid foundation we’d need to consider it a turnaround.

While the headline ceasefire on tariffs may have cooled concerns for a moment, the deeper story remains one of hesitation, with those making longer-term trades likely to remain cautious. With no concrete resolution and deadlines looming, there’s a sense that instability could re-emerge fairly quickly. We’re not out of the woods—not by a long shot.

Delving into macro conditions, what stands out is the momentum loss in output. Economic momentum has slowed—businesses are sitting on cash, investments are sluggish, and hiring decisions appear deferred. That’s pretty telling. It suggests that uncertainty from global risks continues to weigh on boardroom sentiment. Prolonged hesitation like this tends to ripple through markets. From our side, that often creates tricky setups and raises the bar for directional conviction.

External balances are also being watched closely. With the current account sliding, there’s simply less natural demand for dollars. That translates into weaker structural support, particularly when global investors begin to look elsewhere for returns. The flow dynamics are vital here—less foreign buying interest typically means assets may have to reprice, and in a stronger way than some expect.

Then there’s the fiscal stance, which remains loaded with potential consequences. Discussion continues over the scale of Treasury issuance needed to fund widening deficits. Yield questions creep in, and inflation hedges become more relevant once rate direction favours easing. All of this points to more caution for those managing exposure across the curve. In particular, we’re seeing demand for inflation protection pick up, suggesting the market is not fully buying into any disinflation argument.

As we’ve interpreted from Harris and his team, the underlying lean is still towards dollar weakness. They’re paying attention to long-range imbalances, and we are too. Capital has a way of moving away from perceived uncertainty—especially when alternative destinations offer more yield stability or political clarity.

The main takeaway? Don’t assume recent calm means direction has changed. We’re watching the bid/offer spreads tighten, but conviction among long-dollar holders appears thin. Many are trading tactically around events rather than building long-term positions, and we suspect that won’t change until more clarity emerges on spending plans, rate policy, and the next moves from global central banks.

For now, we’re focusing on levels, keeping sizing light, and avoiding overstretch—especially in pairs overly tied to US fiscal or trade risk. Bias towards short-side setups may reassert itself quickly, especially around data inflections or if Treasury supply overshoots. Keep watching those auction tails.

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