The significant long-dollar positioning is weighing on the greenback’s ability to rise.

In Q4 last year, we saw two things happen that lifted the US dollar significantly. The first was that expectations of future Fed easing were pared back significantly even as the bank was cutting rates. The second was that the market priced in an aggressive tariffwielding Trump presidency before, and after, his November 5th victory. But since the turn of the year and Trump’s inauguration last month, we’ve seen the US dollar stall. There has been a good deal of volatility; especially as threats of tariffs are announced and then postponed, but the overall feeling seems to be that the US dollar bulls have discounted much, or all, of the good news for the greenback already.

Hence it seems that significant long-dollar positioning is weighing on the greenback’s ability to rise. It is not unlike the playbook of Trump’s first victory in 2016. For back then we saw a large postelection rally in the US dollar but this ran out of steam around the time of the inauguration and the whole of Trump’s first year in office saw the US dollar fall significantly.

The Standard Bank’s view for some time has been that this scenario would play out again. The difficulty, however, has been in timing the likely turn in the US dollar from a bull trend to a bear trend. As we mentioned earlier, the downtrend last time started around the time of Trump’s inauguration, but we have been reticent to suggest an exact repeat this time.

One reason for this is that US tariff threats, and indeed action in the case of China, have come right at the start of Trump’s presidency, whereas tariffs during Trump’s first term did not start until 2018 (when the US dollar rallied back). With this in mind, we have plotted US dollar turnaround in the 3-6 month period to allow for the fact that early tariffs could both lift the US dollar directly, as well as through forcing the Fed into an elongated cessation of rate cuts.

A predicted slide in the dollar has been envisaged once this initial tariff adjustment has passed and once the Fed gets back to cutting rates. But timing these shifts is difficult, not least because other factors could enter the fray. For instance, this week should see the first concrete proposals from Trump for a peace deal between Russia and Ukraine.

While we are sceptical that a peace deal can be found in the long haul, we don’t doubt that initial soundings could prove positive and so lift the euro, and other ‘risk’ currencies against the dollar. We certainly doubt that a peace deal is priced into the market in the way that things like US tariffs or a Fed rate pause are priced in. Additionally, it seems that positioning in the market is still skewed in favour of the dollar and hence dollar bulls could be wrong-footed if a peace deal seems even remotely possible.

All these factors seem set to keep volatility elevated for some time, and it may take a few months yet for current uncertainties over things like tariffs and the war in Ukraine to ease down and reveal a significant directional trend in the dollar. In the short-term, we still lean towards a firmer dollar but from 3-6 months out, expect the greenback to reverse any gains.

Another issue that we feel is important to the US dollar’s longer-term prospects is the performance of the yen. In our view, the yen is not under the cosh on tariffs as much as many other currencies and its fate against the US dollar might rest more with monetary policy and the relative return on US and Japanese assets. Just today Japan released its December data for the current account.

What’s noticeable here is not the trade component of the record JPY29.3tr current account surplus for 2024, but instead the primary surplus of JPY40.2tr. These monumental surpluses on the primary account reflect the returns Japan makes from its overseas investments; many of which are based on holding higher-yielding bonds, like treasuries. But now, with the rate gap closing as the BoJ tightens policy, there is a danger that repatriation of overseas assets gives the yen a significant lift. It is certainly a key reason why we see US dollar/yen falling to 140 over the coming year and could be a factor that pulls the US dollar down against other currencies as well.