One-year risk reversals — a gauge of how expensive it is to buy versus sell a currency in the options market — fell to minus 27 basis points in favor of puts over calls for an aggregate proxy of Bloomberg’s dollar gauge. That mark is the most negative level on record, according to Bloomberg data going back to 2011, surpassing even a level briefly hit at the outset of pandemic-driven market gyrations five years ago.
Views on the dollar have soured in recent months as President Donald Trump’s on-again, off-again levies buffet markets, casting doubt on both the predictability of US policymaking and the outlook for economic growth.
While losses have ebbed since a reprieve in US-China trade tensions announced earlier this month, the Bloomberg Dollar Spot Index is still down more than 6% so far in 2025 — the worst start to a year since the index launched two decades ago. The gauge slipped for a second session on Tuesday by 0.2%.
“The structural bearish dollar view is still around because the reprieve from trade and China issues is only temporary,” said Kathy Jones, chief fixed-income strategist at Charles Schwab & Co.
The latest issue bolstering short dollar views is the US’ fiscal stance as Trump’s massive tax package winds its way through Congress, highlighting the outlook for the federal deficit. Moody’s Ratings late Friday stripped the US of its top credit rating, citing the rise in government debt over the past decade and increase in interest payments.
The dollar bore the brunt of the market impact of Moody’s downgrade, falling against all of its Group-of-10 peers in the first session after the announcement even as equity and bond markets appeared to shrug off the news.
“What’s more concerning is the continued lack of political will in Washington to address the deteriorating fiscal outlook, wrote a Raymond James investment team including Larry Adam, Tracey Manzi and Matt Barry after the downgrade. “This inaction leaves financial markets vulnerable to bouts of volatility, especially given elevated equity valuations.”
For some the negative sentiment on the dollar — at least in the short-term — is increasingly excessive, especially as the Federal Reserve commits to a wait-and-see stance on monetary policy that could support bond yields in the weeks ahead relative to global peers.
“Our base case is that markets are too bearish on the dollar,” said Nick Rees, head of macro research at Monex Europe Ltd. in London. “Inflation should keep the Fed on hold for longer than traders currently anticipate, while we think growth could also outperform expectations.”
That view is in line with the selloff in dollar abating and the currency trading in a narrow range over the past few weeks. Still, from a longer-term perspective, the argument for a structural decline stems from the US moving away from being a global leader in trade to protectionism, according to Jones at Charles Schwab.
“There’s a modest bounce in the dollar on relief that the worst of the tariffs haven’t been realized, but the long-term prospects still suggest investors may be wary,” she said.