The U.S. dollar concluded its worst week in 14 months as traders contended with a barrage of tariff rhetoric from President Donald Trump, though no substantial actions followed. The Bloomberg Dollar Spot Index dropped 1.6% from the previous Friday, marking its steepest weekly decline since November 2023, when the Federal Reserve concluded its monetary tightening cycle. The dollar extended its losses on Thursday, after Trump appeared to soften his previously aggressive stance on tariffs against China.
Despite President Trump’s outspoken threats regarding tariffs on major U.S. trading partners, including Canada and Mexico, markets remain in limbo, as no immediate executive orders have been issued. Trump has instructed the Treasury and Commerce departments to examine the current trade landscape, with a report due by April 1.
Matthew Hornbach, Morgan Stanley’s head of macro strategy, noted that investors had been hesitant to offload dollars ahead of the inauguration, uncertain whether Trump would swiftly enact tariffs. However, with no immediate action, investors now feel freer to make their moves.
“The longer we get into President Trump’s second term, the more at ease investors will feel expressing their views — that the dollar is overvalued, interest rates are elevated, and both are due for a correction,” Hornbach commented during a Bloomberg Television interview. He anticipates that a shift away from the dollar will benefit currencies like the Japanese yen, euro, and British pound.
Among the Group-of-10 currencies, the British pound led the charge, gaining more than 2.5% against the dollar during the week, buoyed by stronger-than-expected UK manufacturing and services data. The euro is also poised for its best weekly performance since 2023, benefitting from Trump’s trade focus on North American partners rather than the Eurozone.
Goldman Sachs analysts estimated that traders have unwound nearly two-thirds of the tariff risk premium in the euro-dollar pair, despite the bank’s outlook of continued U.S. economic outperformance and trade policies supporting the dollar in the months to come.
“The moves this week are a reminder that a key risk to our view is a repeat of the 2017 scenario, where trade policy remained largely unchanged despite strong rhetoric, leading the dollar to reverse its post-election gains,” wrote a Goldman team led by Kamakshya Trivedi.
Morgan Stanley’s strategists have cautioned that traders are increasingly on the lookout for the right moment to sell the dollar. Their bearish forecast for the greenback remains one of the most pessimistic among Bloomberg’s surveyed strategists.
Since Trump’s election in November, both bullish positions on the dollar and its value have surged. The dollar index has risen more than 3% since November 5, and by January 21, derivative traders were holding roughly $33.7 billion in long dollar positions, the highest since 2019, according to data from the Commodity Futures Trading Commission.
However, some analysts, like those at MUFG, believe this week’s dollar retreat could merely represent a correction of overly stretched long positions. “We remain confident that Trump will actively pursue tariffs, and by the end of next week, the market’s view on tariffs may shift considerably,” MUFG strategists, including Derek Halpenny and Lee Hardman, wrote in a note.
Despite recent fluctuations, the markets continue to closely watch the unfolding tariff policies, with an eye on how Trump’s eventual moves could reshape the dollar’s trajectory.
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