Global investors are more bearish on the U.S. dollar than at any point in at least 14 years, according to a recent survey by Bank of America. The February survey reveals that USD positioning has fallen to the most underweight level in the bank's data set going back to January 2012. In other words, investors are holding less dollar exposure than ever recorded in the survey's history. Dollar’s underweight positioning has now surpassed the previous lows seen during the Trump’s tariff shock in April 2025. D ...

Group 1 - The core viewpoint is that Morgan Stanley anticipates the Federal Reserve will maintain interest rates during the upcoming January FOMC meeting, with a focus on the tone of the statement indicating a dovish pause to soothe the market [1][2] - The Federal Reserve is expected to keep the federal funds rate target range unchanged at 3.50%-3.75%, which is seen as a tactical adjustment rather than a return to a tightening cycle [1][2] - The key for investors lies in the forward guidance, with expectations that the Fed will retain language suggesting consideration for further adjustments, indicating a continued dovish stance [2][9] Group 2 - Jerome Powell is expected to justify the pause by referencing recent strong growth data, stable hiring, and a decrease in the unemployment rate to 4.375% [3] - Despite the Fed's pause on rate cuts, the short-term financing market remains loose, with repo rates normalizing below the interest on reserve balances (IORB), indicating an excess of cash in the system [4] - Morgan Stanley has revised its outlook on the foreign exchange market, now projecting a stronger U.S. economy with an upward adjustment of GDP growth to 2.4% for 2026, while delaying the anticipated rate cuts [5] Group 3 - In the mortgage-backed securities (MBS) sector, the announcement of a $200 billion purchase plan by government-sponsored enterprises (GSEs) has led to a significant narrowing of MBS spreads, prompting a neutral stance from Morgan Stanley [8] - The FOMC statement is expected to upgrade the assessment of economic growth from "moderate" to "robust" and remove references to increased risks in the labor market, reflecting a more positive outlook [9] - The Federal Reserve is projected to maintain a monthly purchase of $40 billion in Treasury bills to manage reserve levels, with expectations that the SOMA account will exceed $600 billion by the end of 2026 [9]

Core Viewpoint - Emerging market spread trading is experiencing a resurgence due to market expectations of a Federal Reserve rate cut next month, leading to a weaker dollar and increased interest in high-yield currencies [1] Group 1: Market Dynamics - Asset management firms such as Loomis Sayles and Aberdeen are increasing their positions in currencies from countries like Brazil, South Africa, and Egypt [1] - Earlier this year, these types of trades yielded double-digit returns, but the momentum slowed in July due to a rebound in the dollar [1] - Recent poor U.S. employment data has strengthened rate cut expectations, driving an increase in arbitrage trading [1] Group 2: Institutional Perspectives - Firms like DoubleLine and UBS have joined the bearish dollar camp, stating that "the bearish narrative on the dollar has returned" [1] - Loomis Sayles' co-head of emerging market debt, Urquieta, believes the likelihood of a significant dollar rebound is limited, citing overall global growth as stable [1] - Urquieta favors carry trades in South Africa, Turkey, and Brazil [1]

Core Viewpoint - The expectation of a Federal Reserve interest rate cut has increased, leading to a resurgence in carry trades among emerging market investors as the dollar weakens and interest in high-yield currencies rises [1] Group 1: Market Dynamics - The carry trade strategy is gaining traction among investors in emerging markets, with firms like Loomis Sayles and Aberdeen Group increasing their positions in currencies from Brazil, South Africa, and Egypt [1] - The softening of the dollar and reduced volatility have created a favorable environment for these trading strategies [1] Group 2: Performance and Expectations - Earlier this year, carry trades yielded double-digit returns, but these were paused in July due to a rebound in the dollar [1] - Recent poor U.S. employment data has heightened expectations that the Federal Reserve may need to cut rates next month to avoid a recession, reviving interest in carry trades [1] Group 3: Institutional Sentiment - Institutions like DoubleLine and UBS have recently joined the bearish sentiment on the dollar, indicating a renewed narrative of dollar weakness [1] - Loomis Sayles' co-head of emerging market debt, Urquieta, expressed limited potential for a significant rebound in the dollar, while noting that global growth remains relatively stable [1]

J P M O R G A N Arindam Sandilya (65) 6882-7759 arindam.x.sandilya@jpmorgan.com JPMorgan Chase Bank, N.A., Singapore Branch Global FX Strategy 29 May 2025 FX thoughts on the tariff ruling And why the dollar still deserves to lag the retracement in risk markets The ruling by the US Court of International Trade that undoes the IEEPA tariffs (i.e. Liberation Day and Fentanyl-related tariffs) is the latest twist in the Trump policy saga. The decision has been appealed and the situation remains fluid, but macro ...