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The U.S. dollar is trying to find its footing again, staging a modest recovery this month after a bruising decline in April. On the surface, things look better: DXY is back above 100, equities are climbing again, and markets seem momentarily relieved by Washington’s latest round of trade diplomacy. But none of this changes the deeper trajectory confidence in U.S. policy credibility remains damaged, and the rebound still feels more like a pause than a turning point.
DXY H4 Chart
The recovery was triggered in part by the Trump administration’s recent trade deal with the UK, a headline-grabbing move that reduced tariffs on specific sectors like autos and steel. But let’s be clear this was no reset. The broader 10% universal tariff remains untouched, and rhetoric from the White House suggests that future deals with other countries will be less generous, especially those with large trade surpluses. Also, with US China trade deal this weekend, rollback from 145% tariffs to around 30%.
What we’re watching is more tactical than strategic. These are short-term efforts to cushion market volatility and reclaim narrative control, not a signal that the U.S. is pivoting toward greater international cooperation. Trump has even hinted the lowest tariff rates offered to other countries after signing deals will be “much higher” than past norms. So, while some are calling this a relief rally, it’s better understood as a reaction to slightly lower chaos not improved fundamentals.
On the monetary side, the Federal Reserve has stuck to its “wait and see” messaging. Powell made it clear this week: the data doesn’t justify action yet, and the Fed isn’t about to pre-empt the next move without a clearer view. The labour market hasn’t cracked at least not visibly, and inflation hasn’t softened enough to justify a cut. As a result, the market has begun dialling back expectations of imminent easing, with rate cut pricing for June and July now fading.
This has helped lift U.S. yields slightly, and by extension, the dollar. But let’s not lose the forest for the trees. The correlation between short-term rate spreads and USD performance has weakened, and a notable disconnect has opened possibly reflecting the political risk premium building into U.S. assets. Markets are hedging not just interest rates but institutional credibility.
US02Y H4 Chart
Outside the U.S., the FX landscape is beginning to stir more broadly. The most eye-catching move has come from Asia, where Taiwan’s dollar (TWD) surged nearly 9% in just a few days. There’s growing speculation that Taiwan may be quietly adjusting its FX policy, potentially reducing intervention to stay in Washington’s good graces ahead of trade talks. That strength has rippled across the region, with the KRW and THB catching some tailwinds. Meanwhile, China’s RMB remains relatively stable Beijing seems intent on anchoring regional currency stability through USD/CNY control.
Interestingly, G10 currencies haven’t fully mirrored the Asia FX story. The AUD, NZD, and JPY all strengthened earlier this week but quickly faded again. This suggests that the market’s shift is still local, not systemic at least for now.
Positioning data reinforces this: leveraged funds have been offloading dollar longs for over three months straight, with the latest data showing the biggest short USD positioning since last October. The most aggressive short interest is clustered around the yen, euro, and pound. Yet traders still hold long USD positions against the AUD and CAD, suggesting there’s caution about high-beta commodity FX while global growth wobbles under policy stress and tighter financial conditions.
Correlation dynamics are also changing. Over the past month, we saw a sharp rise in risk-off behaviour gold, yen, and Swiss franc all clustering as safe havens. But more recently, these clusters have faded. This tells me one thing: the loss of confidence in the dollar hasn’t fully vanished, but it’s becoming more nuanced. The market isn’t running to the exits anymore but it’s still pacing nervously near the door.
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