*Due to a busy schedule I am changing these posts from bi-weekly to monthly, with more content in each post*
Dollar Smile
Firstly, on a structural level, the current resilience in US hard data has not surprised investors, though most still doubt it will last. Short dollar positions against safe havens remain weighed down by negative carry until that uncertainty resolves, as seen in the recent drift in June FOMC pricing and USD/JPY. The trade war backdrop has also shifted, with policymakers more eager to show results. The US-UK deal is modest in scope, with the 10 percent baseline tariff intact, but it helps set a more constructive policy tone.
Secondly, the focus for Dollar weakness has rotated from the DXY to the TWI. In the weeks after reciprocal tariffs were announced, losses were concentrated against safe havens. More recently, EM currencies such as BRL and KRW have taken the lead. The Dollar smile remains intact and may have widened as tail risks ease. In this context, selective EM longs combined with a constructive view on CNY still appear reasonable, supported by the recent tone of policy talks and the broader pattern of Dollar softness.
Global Asset Reallocation
Shifting portfolio preferences is another dollar headwind. I don’t think its a disruptive wave of repatriation but rather a slower adjustment in marginal demand, with relative price changes doing much of the rebalancing. The Dollar’s decade-long strength has coincided with US asset outperformance, and if that fades, valuations leave scope for a further pullback.
Flows are likely to complement the move lower but I don’t think they will be the main cause. Past Dollar declines have happened even with firm foreign inflows. Recent data shows Europe pulling capital back, while non-European investors continue to buy US equities. Early signs point to rising interest in non-US assets. Watching only the scale of Dollar overweights or waiting for clear-cut repatriation risks missing the quieter allocation changes.
UK: Deals and Doves
The new US-UK trade agreement offers some relief but is unlikely to change the macro picture in a meaningful way. The growth forecast for 2025 has been nudged up slightly, reflecting a smaller drag on UK exports, but the services-heavy UK economy was already less vulnerable to US tariffs. With the 10 percent baseline tariff still in place, the boost to cable is likely to be limited.
The Bank of England drew more attention recently, with two MPC members voting to keep rates unchanged, surprising those who expected a regular quarterly pace of cuts. The June cut has been dropped from the baseline, with the first move now seen in August and a terminal rate of 2.75 percent.
In the short term, GBP/USD longs may still benefit from a constructive risk backdrop. Over a longer horizon, the case is weaker given the risk of more BoE easing than is currently priced, an overvalued Sterling on trade-weighted metrics, and a still difficult fiscal position. Upcoming GDP and labour market data will be important, and there is room for Q1 growth to exceed expectations.
-William Lun
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