Dollar Pressure Deepens
- admin cys
- 2 days ago
- 4 min read
A Report by CYS Global Remit Counterparty Sales & Alliance Unit
USD/SGD | 1.2838– 1.2840 |
The U.S. dollar is coming under sustained and increasingly broad-based pressure as systematic investors accelerate selling in response to weakening price trends, declining yield support, and a shifting global monetary policy landscape. According to Bank of America’s latest Systematic Flows Monitor, trend-following strategies — particularly commodity trading advisors (CTAs) — have continued to reduce U.S. dollar exposure, reinforcing a negative feedback loop that is now visible across FX, rates, and risk assets.
BofA analyst Chintan Kotecha noted that the dollar “finished the week lower, with CTAs continuing to sell USD on weaker trends,” adding that the bank’s quantitative models point toward further rotation into other major currencies. Importantly, the selling pressure is no longer isolated to a single USD pair but appears increasingly systemic, reflecting broad deterioration in dollar momentum across G10.
Rates: Treasury Yields No Longer Supporting the Dollar
The dollar’s weakening trend is unfolding alongside renewed downward pressure on U.S. Treasury yields, undermining one of the currency’s key structural supports over the past two years. BofA observed that while Treasury yields moved lower again during the week, futures price trends continued to decline as influential data points from October and November rolled out of shorter-term moving averages.
Trend-following funds remain long 10-year and 30-year Treasury futures, but BofA cautioned that these positions are becoming increasingly fragile. Should price momentum continue to soften, CTAs could transition from being passive holders to active sellers, introducing additional downside risk to yields. Such a shift would further compress U.S. rate differentials versus peers, reinforcing negative dollar dynamics.
Crucially, the rate backdrop is no longer simply about absolute yield levels but about the direction and persistence of yield momentum. As trend signals weaken, the dollar’s ability to attract systematic and real-money inflows diminishes, especially against currencies where rate expectations are stabilizing or turning incrementally more hawkish.
Equities and Volatility: Risk-On Reinforces USD Selling
Across global equities, BofA highlighted that trend followers remain stretched long U.S., European, and Japanese equity markets, supported by declining realized and implied volatility. Kotecha noted that CTA long equity positioning could increase further if volatility continues to compress, extending the current risk-on regime.
This matters for FX because sustained equity inflows typically coincide with reduced demand for defensive dollar positioning. As volatility falls, systematic strategies mechanically reallocate away from USD and into higher-beta currencies, reinforcing flows into AUD, CAD, and selected FX. The current environment — characterized by resilient equities and subdued volatility — therefore remains structurally USD-negative from a flow perspective.
Structural Backdrop: The Dollar’s Worst Year in Nearly a Decade
Stepping back, the dollar is on track for its sharpest annual decline in eight years. The Bloomberg Dollar Spot Index has fallen 8.1% in 2025, reflecting a confluence of cyclical and structural pressures that have steadily eroded the currency’s appeal.
The initial catalyst came in April following President Donald Trump’s “Liberation Day” tariffs, which reignited concerns around trade disruption, fiscal slippage, and retaliatory policy risks. Since then, pressure has intensified as markets increasingly price in a more dovish Federal Reserve trajectory, driven in part by expectations that the next Fed chair will favour growth support over inflation containment. Markets are now pricing at least two rate cuts in 2026, marking a clear pivot away from the restrictive stance that underpinned dollar strength in prior years. This expected easing cycle creates a widening policy divergence with other developed economies, many of which are either delaying rate cuts or actively contemplating further tightening.
Relative Policy Divergence: USD Loses Its Advantage
Elsewhere, the euro has strengthened against the dollar, supported by controlled inflation dynamics and expectations of increased European defence spending. These fiscal developments have reduced pressure on the European Central Bank to ease aggressively, keeping rate-cut expectations relatively restrained and providing the euro with cyclical support.
In Canada, Sweden, and Australia, markets are increasingly pricing in the possibility of rate hikes, reflecting resilient domestic demand, sticky inflation components, and improving external balances. This contrast with the U.S. outlook has narrowed — and in some cases reversed — rate differentials that previously favoured the dollar. As policy paths diverge further, the dollar’s structural premium continues to erode. Without the twin pillars of yield advantage and safe-haven demand, USD positioning becomes increasingly vulnerable to both discretionary and systematic selling.
Outlook: Trend, Flows, and Policy Aligned Against USD
Taken together, the alignment of weakening price trends, declining yield support, robust risk appetite, and an increasingly dovish U.S. policy outlook suggests that dollar pressure is unlikely to abate in the near term. While positioning in certain FX pairs appears stretched, the broader macro and flow environment remains consistent with continued USD underperformance. Absent a material shock to global risk sentiment or a decisive repricing of U.S. rate expectations, the balance of risks continues to skew toward further dollar depreciation — particularly against currencies supported by tighter policy expectations, improving growth narratives, or favourable systematic flow dynamics.
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