Is the Dollar Recovering After Trump’s Shock, or Does the Downtrend Continue

The recovery of the U.S. dollar is misleading, as it largely reflects the reversal of traders’ impulsive reaction to comments from President Donald Trump. The Bloomberg Dollar Spot Index rises by about 0.3%, but this is more of a pause in the currency’s decline than a sign of a sustained rebound.

The index is now close to its levels before Trump stated that he is unconcerned about a falling dollar. While these seemingly offhand comments helped major currencies spike above certain round numbers (led by EUR/USD crossing 1.20), this should not obscure the significantly larger declines that occurred earlier on Tuesday.

This drop was fueled by perceptions that U.S. assets may again be at the center of global growth this year, as discussed by Tatiana Daries. This further highlights the end of the theme of American “exceptionalism,” which had contributed to the dollar’s strength alongside the weight of U.S. equities in the global fund market.

Investors may also refrain from pushing the dollar significantly higher ahead of the Fed meeting on Wednesday. The central bank’s orientation to move away from rate cuts is clear enough to lead traders to expect a prolonged pause in the easing cycle. With no real likelihood of the Federal Open Market Committee (FOMC) raising rates, the only serious potential shift in outlook would be a slightly softer tone. The risk-reward ratio for the U.S. currency remains heavily tilted toward further weakness.