The dollar, which recorded its best single-day performance since the USA elections on Monday, has reverted to its original state, with 61 billion dollars in short-selling ammunition still aimed at the fallen Global financial safe haven......
On Tuesday, the USD gave back its gains from the previous day. Although trade tensions eased somewhat, traders remained skeptical that the recent rise in the USD could be sustained.
As of the time of writing, the USD index fell by 0.4%, while positions in the Options market continued to favor shorting the USD. Data from deposit trusts and clearing companies indicated that the nominal value of USD short positions has totaled about $61 billion so far this week, exceeding the $55 billion in USD long positions.
On Monday, the USD experienced its best day since the US presidential election, rising 1% during the day, as both the USA and China agreed to temporarily lower trade tariffs. This fueled hopes that the world's largest economy could avoid recession and prompted traders to cut back on bets for a Fed interest rate cut.
Kristoffer Kjaer Lomholt, head of Forex and Corporate Research at Danske Bank, wrote in a report to clients that the rebound of the USD was "entirely a reversal of trades after 'Liberation Day'."
According to some unnamed Forex traders, this was due to a lack of new bullish demand in both the spot and Options markets, which led hedge funds to reduce their USD short positions.
On Monday, optimism surrounding the trade truce marking the end of the comprehensive tariff war severely depressed traditional safe-haven currencies like the Yen and Swiss Franc, while Put Options on the British Pound were also active. In contrast, Euro, Chinese Yuan, and Norwegian Krone options against the USD predominantly inclined toward shorting the USD, with about two-thirds of trades betting that the USD would weaken again.
Options traders have been selective in their bets on going long on the USD.
On Tuesday, the optimism towards the USD has faded, with many companies reiterating their belief that the dollar will continue to decline. George Saravelos, Global Head of Forex Strategy at Deutsche Bank, stated in an interview that although US policy direction appears more "reconciliatory," actual funds Hold and central banks remain cautious about the "concentration risk" associated with US Assets.
He wrote earlier in a report: "All the news from the past few weeks has been more favorable for the rest of the world, thus unfavorable for the USD, especially against currencies sensitive to economic growth."
Several banks, including United Bankshares and Rabobank, have also stated that despite the recent rebound of the USD, it will decline in the long term and have raised their expectations for the Euro and Chinese Yuan respectively.
Analysts Jan von Gerich and Philip Maldia Madsen from Nordea wrote in a report: "While recent events have somewhat reduced the likelihood of a severe trade war, the continued policy reversals still imply high uncertainty surrounding the US government's ultimate goals."
The options market remains bearish on the USD.
Forex Options Trading activity increased on Monday, but it remained relatively subdued. The options trading volume is about 10% higher than the three-month average level, but still 30%-35% lower than levels during significant events such as the suspension of the German debt brake or the announcement of reciprocal tariffs by Trump on April 2.
Macquarie's strategists Thierry Wizman and Gareth Berry wrote: "Given the damage caused by the April tariff turmoil, the view of the USD as a 'fully creditworthy' trading counterpart will not recover quickly. This will limit the USD's gains, after which the dollar will depreciate again due to pre-existing trends before the April tariff turmoil."
The so-called risk reversal (reflecting the demand difference between Call Options and Put Options) still shows long-term bearish sentiment towards the USD, although slightly lower than last week.
Elias Haddad, a Forex strategist at Brown Brothers Harriman, pointed out: "The protectionist trade policies of the USA increase the risk of the USA economy entering a period of stagflation. Therefore, we expect the USD to face downward pressure again."
