Is the US dollar entering a new round of "bear market"? The "revenge tax" may become a new threat

According to the Zhitong Finance APP, although U.S. stocks have largely recovered from the declines caused by tariffs in April, the performance of the dollar has yet to regain its vitality. Since 2025, the ICE Dollar Index has fallen by about 8.8%, dropping below 99, marking the weakest annual start at least since the mid-1980s. Analysts point out that this round of dollar weakness is not only due to market turbulence but also reflects that the trade policies of the Trump administration are changing global investors' positioning of the dollar in their asset allocation.

After several years of strong appreciation, the dollar is now experiencing a significant correction. Peter Vassallo, a foreign exchange portfolio manager at BNP Paribas Asset Management, believes, "We may be entering a longer-term downtrend for the dollar. Although the worst-case scenario risks from tariffs have decreased, uncertainties in U.S. policy and hostility towards foreign trade still exist."

Marvin Loh, a senior global macro strategist at State Street, also stated, "The dollar indeed has room for further decline." Looking back at history, since 2002, the dollar has undergone a six-year depreciation cycle, during which the euro rose strongly, and a similar pattern seems to be repeating itself now.

Currently, there are not many hopes supporting a rebound for the dollar; instead, new uncertainties are accumulating. For example, the Trump administration's proposed Section 899 in its payment bill aims to grant the White House the power to impose a "revenge tax" on foreign investors if these investors come from countries that implement "unfair tax policies" against the U.S.

Steven Englander, head of G10 foreign exchange research at Standard Chartered Bank, pointed out that if this provision is implemented, "it will suppress capital inflows and have a negative impact on the dollar."

Although some investors have returned to the U.S. stock market due to "Trump rarely following through on his aggressive tariff threats," driving the so-called "TACO trade," the "revenge tax" provision has undoubtedly shaken foreign capital's confidence in holding dollar assets once again.

While the dollar's weakness in 2025 appears severe, some analysts remind that considering the significant rise of the dollar after the 2024 election, the current decline is not exaggerated in long-term charts.

Vassallo believes the dollar is still overvalued, stating, "This is one of our main reasons for shorting the dollar." He emphasized that while this strategy is becoming increasingly common, it has not yet reached an "overcrowded" level and still has room for decline.

A deeper risk lies in the fact that investors, especially institutional investors, are rethinking how to manage their dollar exposure in their global asset portfolios. Due to the simultaneous decline of the dollar, stocks, and bonds in April, investors have realized that the dollar no longer serves as a safe haven as it once did, prompting them to increase their dollar hedging efforts, such as selling dollars through forward contracts.

Data from State Street indicates that U.S. investors are particularly keen on hedging their overseas assets against the dollar, while institutional investors from Denmark, such as insurance companies and pension funds, have also significantly increased their dollar hedging ratios.

George Saravelos, a strategist at Deutsche Bank, pointed out that since the beginning of the year, the dollar hedging behavior of Danish institutional investors has "clearly accelerated," reflecting widespread market expectations of a long-term weakening of the dollar In addition, the massive fiscal deficit in the United States and the Trump administration's efforts to reduce the trade deficit have prompted more investors to increase their hedging against the dollar, further intensifying the pressure on the dollar.

Market sentiment is generally bearish on the dollar, but there are still glimmers of hope. Vassallo stated that if U.S. assets perform exceptionally well again, "returning to the era of 'American exceptionalism'," the dollar could still make a comeback. "The value of the dollar largely depends on international capital flows. If U.S. stocks rebound strongly and the U.S. economy leads the world again, it will attract global investors once more."

However, as of now, the ICE Dollar Index has fallen again by 0.6%, reporting at 98.75, showing weakness not only against developed market currencies but also experiencing continued depreciation against emerging market currencies such as the Mexican peso and Brazilian real