As Donald Trump embarks on his second term, currency speculators are showing the strongest support for the U.S. dollar since before his first presidency. Since late September, investor sentiment has shifted towards a stronger dollar, driven by expectations of a robust U.S. economy, continued high U.S. interest rates, and a Trump win. This has resulted in a dramatic reversal of a $15 billion leveraged short position into a $35 billion leveraged long position in the dollar.
The dollar index has surged by 10%, reaching a two-year high and setting records against emerging market currencies like the Brazilian real and Indian rupee. At the beginning of the Trump 2.0 era, the dollar index stands about 20% higher than its 25-year average.
However, some analysts, including those at Morgan Stanley, caution that the dollar may have already priced in much of its recent strength. They argue that factors like Treasury yields and the narrative of “U.S. exceptionalism” are reaching their limits, with market sentiment overly optimistic about Trump’s dollar-friendly tariffs.
Despite differing views, analysts are divided on the near-term direction of the dollar. Goldman Sachs maintains a bullish outlook, citing continued U.S. economic outperformance, but with positioning heavily skewed toward the dollar, the risk of a decline remains high.
The dollar’s recent retreat, following a Trump official’s statement about postponing tariffs on trading partners, highlights the volatility of the current market, marking a potential turning point for the “mighty dollar.”
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