Dollar Bears Say U.S. Weakness and Fed Cuts Could Resume Greenback’s Record Slide

After a temporary lift, the dollar looks fragile again as fiscal pressures and rate-cut bets mount

Many investors believe the recent stabilization in the U.S. dollar is just a pause before its long slide resumes. After dropping roughly 11% through mid-2025, the dollar has steadied, but few expect that strength to hold. Key concerns include large U.S. trade and budget deficits, worries over a cooling labor market, and growing expectations the Federal Reserve will cut interest rates.

What’s Driving the Bearish Case

• The dollar index fell about 11% in the six months through June, one of its steepest declines in decades.
• Speculators have reduced their net short-dollar positions sharply from ~$21 billion in June to ~$5.7 billion more recently. Some view this as profit-taking rather than genuine bullishness.
• Structural deficits in both trade and the federal budget are weighing on the greenback’s fundamentals. Policy uncertainty and protectionist trade messaging exacerbate concerns.
• Expectations that the Fed will cut rates, potentially more aggressively than markets currently assume, are also feeding bearish sentiment. Lower U.S. yields make holding dollars less attractive.

How Markets Are Already Reacting

• Investors are increasing hedging activity tied to the dollar, particularly via FX forwards and swaps, which can add downward pressure if activity picks up.
• Emerging market and foreign investors holding large U.S. asset positions are increasingly sensitive to currency risk. A weaker dollar may boost their returns, but volatility could rise.
• U.S. bonds and Treasuries may see yield differentials narrow with foreign bonds as global rate expectations adjust. That can affect capital flows into U.S. assets.

Risks That Could Shift the Outlook

• If U.S. economic data (jobs, consumer spending) surprises on the upside, the Fed might push back rate cuts, supporting the dollar.
• Geopolitical or trade disruptions could drive safe-haven demand for the dollar in times of crisis.
• Inflation staying sticky or rising again could force a more dovish policy stance to adjust, possibly weakening the dollar further, though that’s a delicate balance.

Market Implications Ahead

• Currencies: Euro, yen, and other major pairs likely to benefit if the dollar resumes decline. Currency markets may see sharper swings.
• Equities: U.S. exporters might benefit from a weaker greenback; multinational companies will have to manage currency headwinds.
• Commodities: Many are priced in dollars; a weaker U.S. dollar often supports higher commodity prices (oil, metals) in local currency terms.
• Global Bonds: Yield curves in U.S. Treasuries versus foreign sovereigns may tighten; foreign bond markets become relatively more attractive.

In summary, while the U.S. dollar has paused its descent, most indicators suggest its slide is far from over. With fiscal pressures, trade deficits, and rate-cut expectations stacking up, bears believe there’s more room for weakness. The core theme: structural U.S. vulnerabilities plus global rate dynamics may continue to weigh on the dollar into late 2025.