Dollar Momentum Fades Amid Fiscal Concerns and Tariff Pressure
The US dollar has lost momentum and is struggling to maintain its value in recent market trends. According to MUFG Research, this decline in dollar strength can be attributed to the narrative of a possible debasement trade and concerns over elevated fiscal deficits and long-end Treasury yields. Despite economists upgrading US Q3 GDP growth forecasts to 2.5% annualized from 2.0%, supporting the notion of continued US economic resilience, the dollar's ability to benefit from this growth has been hindered.
Investors continue to retain a modest net long USD bias, as evident in speculative positioning data. However, the divergence between relatively resilient USD positioning and weaker price action suggests that the dollar's upside momentum is fading for now. Furthermore, President Trump's recent imposition of 50% tariffs on about $20bn in Canadian goods (approximately 4-5% of Canada's annual exports to the US) may contribute to a negative risk premium on the dollar.
In Asia, currencies such as KRW, TWD, SGD, and MYR are expected to benefit from strong external balances, technology exports, and relatively resilient domestic fundamentals. The ongoing demand for AI and semiconductor technologies is expected to continue supporting these currencies, with SGD also benefiting from macro stability and defensive characteristics.