Wall Street Speaks with One Voice: The US Dollar Will Fall Further!

More and more Wall Street investment banks have recently reiterated their forecasts that the US dollar will weaken further due to interest rate cuts, a slowdown in economic growth, and the trade and tax policies of US President Trump.

Morgan Stanley has stated that the dollar will fall to its lowest level during the COVID-19 pandemic by the middle of next year; JPMorgan Chase is similarly bearish on the dollar; Goldman Sachs has indicated that if tariff measures are blocked, Washington's efforts to seek alternative sources of revenue could have an even more negative impact on the dollar.

"We believe that a medium-term narrative around dollar depreciation is taking shape," said Aroop Chatterjee, a strategist at Wells Fargo in New York.

On Monday, amid escalating global trade tensions, the dollar fell against all G10 currencies once again. Currently,the ICE US Dollar Index has accumulated an 8.9% decline year-to-date. According to Dow Jones Market Data, this represents the worst performance for the index in the first five months of the year on record.

The Traditional Carry Trade Logic Has Been Upended

It is worth noting that one of the most striking aspects of the dollar's continued weakness this year is the near disappearance of the traditional carry trade logic in the foreign exchange market.Due to President Trump's erratic policies, investor interest in US assets has cooled, and the traditional close relationship between US Treasury yields and the dollar has broken down.

In the past, the movement of long-term US Treasury yields, which measure government borrowing costs, tended to move in tandem with the dollar exchange rate, with higher yields typically indicating a strong economy and attracting foreign capital inflows.

However, since Trump announced his "Liberation Day" tariffs in early April this year, the 10-year US Treasury yield has risen from 4.16% to 4.42%, yet the dollar has declined by 4.7% against a basket of currencies. Last month, the correlation between the dollar exchange rate and US Treasury yields fell to its lowest level in nearly three years.

Shahab Jalinoos, head of G10 FX strategy at UBS Group, said, "Under normal circumstances, a rise in US Treasury yields indicates a strong US economy. This is attractive for capital inflows into the US."

However, he also noted that"if yields rise due to higher US debt risks, fiscal concerns, and policy uncertainty, then the dollar will weaken simultaneously. This pattern is actually quite common in emerging markets."

And currently, the situation facing the dollar is undoubtedly the latter. Trump's aggressive push for the "Big Beautiful Bill" could exacerbate the US budget deficit, coupled with Moody's recent downgrade of the US sovereign credit rating, has made investors more concerned about the sustainability of the deficit and has placed severe pressure on US Treasury prices.

Analysis by Torsten Sløk, chief economist at Apollo, shows that the credit default swap (CDS) spreads of the US government—a trading level reflecting the cost of hedging against loan default risks—are now similar to those of Greece and Italy. These two countries were once the "epicenters" of the European debt crisis.

Trump's attacks on Fed Chairman Jerome Powell have also unsettled the market. He met with Powell last week and told the Fed Chairman that it was a mistake not to have implemented an interest rate cut so far this year.

The US dollar has significant downside room.

Michael de Pass, global head of interest rate trading at Citadel Securities, said, "In the past, the strength of the US dollar was partly derived from the integrity of its institutions: the rule of law, the independence of the central bank, and the predictability of policies. These factors made the US dollar a reserve currency."

But he added, "In the past three months, these have all become issues. A major concern in the market currently is that the institutional credibility of the US dollar is being eroded."

The divergence between US Treasury yields and the US dollar indicates that the market's traditional carry trade pattern has changed significantly in recent years—when expectations about the direction of monetary policy and economic growth were key drivers of government borrowing costs and exchange rate movements.

Andreas Koenig, global head of foreign exchange at Allianz Global Investors, said that the new pattern may increase the risks faced by investors seeking safe-haven assets.

He said, "This changes everything. In the past few years, holding long positions in the US dollar in a portfolio had been a very good stabilizing factor. When the US dollar was a stabilizing factor, you had a stable portfolio. But if the US dollar suddenly becomes correlated with other asset classes, that increases risk."

Open interest data from the US Commodity Futures Trading Commission shows that market participants' bearish sentiment toward the US dollar is still far from extreme levels, underscoring that the US dollar may still face significant downward pressure in the future.

JPMorgan strategists led by Meera Chandan strengthened their negative view on the US dollar last week, instead recommending bets on the Japanese yen, euro, and Australian dollar. Morgan Stanley also listed the euro, yen, and Swiss franc as the biggest winners from a US dollar decline.

Skylar Montgomery Koning, currency strategist at Barclays, said that the US dollar's headwinds may come from further weakness in the bond market, an escalation of trade wars, and weak US data.

Paresh Upadhyaya, head of foreign exchange strategy and portfolio manager at Amundi Pioneer Asset Management, expects thatthe Bloomberg Dollar Index will depreciate by another 10% over the next 12 months.

"Capital Tax" Adds Insult to Injury

For Goldman Sachs, another major risk that could further exacerbate the outlook for the US dollar is Trump's potential "next move" against foreign enterprises and investors—namely, the "Section 899" of the "Grand Beautiful Bill" mentioned by many market participants last week.

As Caixin reported last week, this section would allow the US to impose additional taxes on enterprises and investors from countries deemed to have punitive tax policies. In other words, if a country is identified by the US Treasury Department as engaging in "unfair taxation," entities from that country—including enterprises, residents, and even overseas controlled companies held by these individuals or enterprises—may face higher tax rates on their investments and business activities within the US.

Goldman Sachs strategists, including Kamakshya Trivedi and Michael Cahill, wrote in a report that even though the scope of application of this tool is relatively narrow,at a time when investors are already viewing the shift in cross-asset correlations as a reason to avoid US assets and seek greater diversification, such tools will still exacerbate investors' concerns about US investment risks.

In another report, Goldman Sachs strategists stated that their models indicate the US dollar is overvalued by about 15%, suggesting there is further downside room. They added that this decline could be driven by the reallocation and repricing of global assets.

Goldman Sachs strategists believe that investors should prepare for a weaker US dollar—especially depreciation against the euro, yen, and Swiss franc, which have all appreciated in recent months. They also pointed out that these new risks provide a strong rationale for allocating some funds to gold.

Matthew Hornbach, global head of macro strategy at Morgan Stanley, also said in a media interview on Monday, "Investors outside the US are reevaluating their exposure to the US—both in terms of asset holdings and the currency risk exposure associated with these asset holdings. They have increased their hedging ratios, which is one of the factors contributing to downward pressure on the US dollar over the next 12 months."

The bank forecasts that the US dollar index will fall by about 9%, reaching 91 by this time next year.

Shahab Jalinoos, a strategist at UBS, pointed out, "The greater the policy uncertainty, the more likely investors are to increase their hedging ratios.If hedging ratios increase based on the existing stock of US dollar assets, this could lead to billions of dollars in selling.""