Dollar Bears on the Offensive as US Growth Cools and Tariff Tensions Rise

The tide is turning for the US dollar, as a combination of slowing economic momentum and fresh tariff threats reshapes global currency positioning. After a solid 7.1% rally last quarter driven by “US exceptionalism,” the greenback now faces a growing wall of skepticism—from asset managers to hedge funds—who see mounting downside risks.

A Shift in Positioning: From Crowded Long to Building Shorts

The narrative has flipped. Invesco, Columbia Threadneedle, and Mount Lucas Management are among the latest to join the bearish camp, betting that the dollar’s peak is behind us. Morgan Stanley and Société Générale have also been vocal, warning clients that the dollar trade has become overcrowded and vulnerable to a reversal.

This isn’t just about near-term noise from tariff headlines. It’s about a broader shift in the underlying macro landscape—one where slowing growth, rising political risk, and global diversification all conspire to erode the dollar’s appeal.

Tariffs, Inflation, and the Fed Pivot

Trump’s renewed tariff threats have been a temporary lifeline for the dollar, triggering short-lived spikes on perceived safe-haven demand. But the longer-term implications are more nuanced. Higher import costs could reawaken inflation pressures just as the economy shows clear signs of losing steam. That’s a tough spot for the Federal Reserve, which now faces mounting pressure to cut rates to cushion the slowdown.

Markets are already adjusting. Fed rate cut expectations have firmed, with traders now pricing in roughly 70 basis points of easing by year-end. As the Fed’s policy path diverges from more cautious central banks in Europe and Japan, the relative rate advantage that fueled the dollar’s rally is starting to erode.

Economic Data Paints a Softer Picture

Recent US data flow has only reinforced the bearish case. Pending home sales have sunk to historic lows, jobless claims are rising, and federal layoffs are adding to labor market strain. Combined with softer manufacturing readings and weaker corporate investment, these signals point to a cooling economy that’s losing its post-election momentum.

Mount Lucas Management’s co-CIO David Aspell puts it bluntly: “Markets have been pricing in the upside of policy, but they’re underestimating the drag from some of these growth-negative measures.”

That reality is pushing funds to rethink dollar exposure, with some actively shorting the dollar against currencies like the British pound, Mexican peso, and even selecting emerging market currencies.

Geopolitics and Global Shifts

On the global stage, evolving geopolitical dynamics are also shifting sentiment. The dollar’s brief surge last week, sparked by fresh tariff threats on Mexico, Canada, and China, was tempered by growing optimism in Europe. With European leaders committing to higher defense spending and working toward stabilizing Ukraine, confidence in the eurozone’s economic resilience is improving. That’s giving the euro and select Eastern European currencies a modest tailwind.

Eli Mizrahi of Targa 5 Advisors sees broader implications: “A more stable security environment in Eastern Europe doesn’t just reduce geopolitical risk—it boosts investor confidence, supports capital flows, and underpins economic stability.”

The Bond Market’s Early Warning Signal

Fixed income markets are also flashing caution for the dollar. Two-year Treasury yields have slid to their lowest level since October, reflecting growing bets on Fed easing. For DWS Americas’ George Catrambone, that’s a classic precursor to dollar weakness. “When rates fall, the dollar tends to follow. It’s a signal that the macro backdrop is shifting—and investors are getting ahead of it.”

A More Complex Dollar Outlook

That said, the path forward isn’t one-way. Hedge funds have scaled back some of their dollar longs, but positioning is far from outright bearish. The wildcard remains tariffs—should Trump’s latest threats materialize into sweeping levies, there’s still room for short-term dollar support. Goldman Sachs, for example, continues to flag this upside risk.

But for longer-term investors, the calculus is changing. Invesco’s Alessio de Longis sums it up: “The volatility is here to stay, but it’s getting harder to see the dollar as the ultimate winner.”

Key Data and Events to Watch This Week

March 3: ISM Manufacturing PMI, Construction Spending, New Orders & Employment Data
March 5: ADP Employment Change, ISM Services Index, Factory Orders, Fed Beige Book
March 7: Nonfarm Payrolls, Unemployment Rate, Average Hourly Earnings

Fed Speakers

March 3: St. Louis Fed President Alberto Musalem
March 4: NY Fed President John Williams
March 6: Atlanta Fed President Raphael Bostic, Fed Governor Christopher Waller, Philadelphia Fed President Patrick Harker
March 7: Fed Chair Jerome Powell on Economic Outlook

With US growth cooling, Fed cuts back in focus, and global policy risks rising, the dollar’s exceptionalism narrative is running out of fuel. For investors, that means reassessing dollar exposure, paying closer attention to global policy divergence, and preparing for a more volatile currency landscape ahead.