The strong U.S. economy + trade hedging "dual engines" support, the dollar's sharp drop is hard to shake the bulls' confidence

According to Zhitong Finance APP, traders are betting that the sharp drop in the US dollar on February 5 may be temporary, given the relatively strong US economy and the possibility that the trade war could force investors into safe-haven assets. On February 5, the Bloomberg Dollar Spot Index fell 0.7%, ending a six-day streak of gains. The index had previously reached its highest level since 2022 during Asian trading earlier in the week, as speculators prepared for US tariffs that were set to take effect on February 1. However, US President Donald Trump decided on February 4 to delay tariffs on Mexico and Canada, causing the dollar to give back its gains, with the dollar index currently slightly below last week's closing price.

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Analyst Opinions

Nevertheless, most market observers believe that this decline is merely a temporary setback. Nomura International, Brown Brothers Harriman, and HSBC stated that regardless of how Trump's tariff policy changes, there are strong reasons to be bullish on the dollar.

Commerzbank and Mizuho Bank believe that ongoing concerns about trade prospects may support a bullish stance on the dollar. Strategists from Commerzbank and Mizuho Bank argue that trade issues will boost the dollar given the risks of additional tariff measures, with the European Union likely being the next target.

Antje Praefcke, a senior foreign exchange analyst at Commerzbank, stated, "As long as Trump is on the big stage flaunting his power, who would really want to short the dollar? The next shock is sure to come, and it will likely be favorable for the dollar again."

Anthony Foster, head of G10 foreign exchange spot trading at Nomura Securities, said, "If we completely set aside the tariff issue, there are still ample reasons to be bullish on the dollar."

For dollar bulls, the key lies in the US economy continuing to outperform other economies, which strengthens market expectations that the Federal Reserve will abandon further rate cuts before mid-year and that the extent of rate cuts by year-end will be less than those anticipated by the European Central Bank and the Bank of England.

HSBC strategist Daragh Maher pointed out, "If we step back from the noise around tariffs, you still return to the US story, which has largely been one of American exceptionalism."

Despite this, the Bloomberg Dollar Index still fell to its lowest level of the day after reports indicated that the number of job openings in the US fell more than expected in December, reaching a three-month low, suggesting that the labor market is gradually slowing.

Market Reaction

The market reacted noticeably to the adjustments in Trump's tariff policy. Trump agreed to delay the deadline for imposing a 25% tariff on Canada and Mexico by one month, which provided some relief to the market. However, global trade tensions remain, and traders are waiting to observe the effects of China's countermeasures, as Trump's 10% tariffs on China took effect on February 1 In the emerging currency markets, most currencies have risen, with the Chilean peso leading the way, and copper prices have also increased. Copper is Chile's largest export product and a barometer for global economic growth. Driven by the decline of the US dollar, copper prices have risen in London, making it cheaper for buyers holding other currencies.

The indicator measuring the popularity of the US dollar in the options market remains close to its highest level in seven months. JP Morgan strategist Patrick Locke and others have pointed out that so far, they have not seen evidence of widespread liquidation of long positions in the dollar in the derivatives market.

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Since the US presidential election, Bloomberg's dollar index has risen by about 4%. Traders are betting that the dollar will appreciate, as they speculate that Trump's policies may boost economic growth and reignite inflation. According to the latest data from the Commodity Futures Trading Commission, speculative traders hold about $33.7 billion in long positions, close to the highest level since 2019.

XTB Ltd. research director Catherine Brooks stated, "As in the past few months, the upward trend of the dollar remains very evident. The dollar's movement shows a multi-year cycle, and we will continue to monitor this trend."