Trump, the Fed, and the Dollar: What’s The Pain Trade?
Source: FT article, 1st September 2025 (available HERE)
Optimism about the dollar was strong at the start of this year. Rate cuts had been priced out; the ‘US exceptionalism’ narrative was widespread; forthcoming tariff announcements were expected to be ‘dollar positive’*; and, after Trump’s 2024 election win, there was an expectation that ‘animal spirits’ would be revived in the US economy.
In reality, there was a classic ‘blow off top’ pattern in the dollar (for detail see our SHORTview publication: 14th January 2024: “US Dollar: Blow-Off Top?”) and the US economy has rolled into a soft patch this year, for a number of reasons (see 18th December Quarterly Asset Allocation note “US Mid Cycle Slowdown Expected (2025)”). With that, the rates market has re-priced and the dollar has broken below a number of key support levels (FIG 1).
In recent weeks the bears have called for yet more dollar weakness, given the risk that the Fed will lose its independence and be forced to cut rates. In particular, fears of ‘fiscal dominance’ have grown, with many academics and economists downgrading their view of Fed credibility (according to a recent FT poll, see quote above). For further analysis see last week’s Longview on Friday “Debt, Reserve Status, and Diverging Bond Markets”.
Of interest, though, US dollar price action has been relatively robust, i.e. since Trump’s ‘attack’ on the Fed began in early August. In particular, the DXY continued to trade around its 50 day moving average last month. It has therefore failed to move lower, despite bearish newsflow (i.e. it’s been a resilient market).
That’s probably because speculative positioning is already net SHORT (e.g. see FIG 2) while, in a similar vein, measured sentiment readings are bearish. Reflecting those, and other indicators, our medium term market timing model for the dollar is therefore generating a contrarian BUY signal (see FIG 3).
As such, and while there are strong macro reasons for a multi-year phase of dollar weakness, the near term ‘pain trade’ is currently upwards.
* With other currencies moving lower to re-gain competitiveness.
FIG 1: US dollar index (DXY futures), shown with 50 & 200 day moving averages
FIG 2: Net speculative DXY LONG positions as percentage of open interest (i.e. below 50% = market net SHORT)
FIG 3: USD Market Timing Model vs. USD (DXY)
