The shadow of tariffs lingers and Wall Street maintains a bearish stance on the US dollar.

This week, the epic rebound in the US stock market has occurred, and the calls for an economic recession have been pushed aside. However, foreign exchange traders continue to have a bearish outlook on the US dollar. Strategists from J.P. Morgan and Deutsche Bank have said that the US dollar will continue to weaken, with options traders having the most pessimistic sentiment in five years. The US dollar index is still close to its lows from April, indicating that despite the easing of tensions in US-China trade, investors remain cautious about returning to the US dollar. It has been a turbulent process, with the US dollar falling 6% against a basket of currencies this year. Many believe that US policy-making is still unstable and unpredictable, lowering the attractiveness of the US dollar. Despite denials from Washington, some investors still suspect that the Trump administration wants a weaker US dollar to support the US manufacturing base. Kamakshya Trivedi, global currency chief at Goldman Sachs, said this week, "The US exceptionalism is gradually eroding, and these movements will last longer." Valentin Marinov, head of FX strategy at Crdit Agricole CIB, stated that while the momentum for "selling USA" trades may have weakened, the market still feels uneasy. He mentioned that investors now have a "love-hate relationship" with the US dollar. Bets on the US dollar falling over the next year in the options market are currently at their highest level since 2020. These long-term options are usually traded by fund managers rather than short-term speculators, indicating a broader reassessment of US dollar exposures. Meanwhile, in the stock market, the S&P 500 index rose 4.5% this week as President Trump's Middle East trip sparked optimism in tech stock trading, alongside subdued inflation data. A report from Bank of America cited data from EPFR Global, indicating that US stock funds attracted around $19.8 billion in capital in the week ending May 14, the first inflow in five weeks. Following the news of a temporary reduction in tariffs agreed upon by the US and China, the US dollar rose 1% on Monday, but later in the week, the dollar gave back most of its gains. Peter Kinsella, head of FX strategy at Union Bancaire Prive, noted that the dollar's underperformance compared to the stock market suggests that "international investors simply do not buy into Trump's America-first theme." Erik Nelson, macro strategist at Wells Fargo, believes that for the US dollar to weaken further, there need to be more signs of structural economic slowdown in the US. He added, "I try to keep a very open mind because the dollar's moves in April were quite erratic." George Saravelos, global head of FX strategy at Deutsche Bank, pointed out that inflows into US assets have slowed down, and Taiwan has requested banks to review their risk management agreements for US investments. All this indicates that purchases of US Treasury bonds, traditionally considered the world's safest investment, will decrease. Saravelos stated that the clearest sign will be the decoupling of US Treasury bond yields and the US dollar. This would lead to a decline in the US dollar against the Japanese yen, while US Treasury bond yields rise, as Japan has traditionally been one of the largest investors in US fixed-income assets, and any slowdown in purchases would have an impact. Strategists from J.P. Morgan said that the reasons for shorting the US dollar still exist. The team, including Meera Chandan, wrote, "The US softening on tariffs will support economic growth in other parts of the world, boosting their currencies." Ven Ram, macro strategist at Bloomberg, said, "Notice how the US dollar index rebounded from its lows in April. So, despite the knee-jerk reaction that we've seen in the past few days from headlines, the market doesn't seem to quite believe the White House is actively driving the currency as part of its trade negotiations." Mark Nash, strategist at Jupiter Asset Management, believes investors are looking to short the US dollar against countries holding large amounts of dollars. The South Korean won and Indonesian rupiah are two currencies he is particularly focusing on. He said, "Asia is now at the forefront of the global repatriation theme. Investors are withdrawing funds from the US."