What’s wrong with the dollar?

Notwithstanding a nascent bounce that finds the DXY pushing back above 100, setting aside a good day on Thursday and forgetting that current levels are high by pre-pandemic standards (that’s a lot of caveats, but that’s me, Mr. Cover His Bases) the greenback’s still sitting near multi-year lows.

That makes for an interesting juxtaposition with US equities, which are in the process of recouping losses and also Treasury yields, which are trying to stabilize following the tumult triggered by Donald Trump’s “reciprocal” tariff unveil last month.

To be sure, stocks are still meaningfully lower versus February’s records, and the bond market’s nowhere near out of the proverbial woods (see the five-year low indirect award at Thursday’s long bond sale, for example). But locally anyway, markets have seemingly settled into something that vaguely resembles stability. I don’t think it’ll last, but hope’s still legal. For now.

So, back to the question: What’s the deal with the dollar? Why has it not retraced Trump-inspired losses?

As the figure shows, the rebound’s a halting, tepid affair when it’s discernible at all.

What accounts for that? The melodramatic explanation says the world’s abandoning USD assets as we speak — that reserve managers and all sorts of other very important people are in the process of actively cutting their exposure to a sunsetting empire.

The less histrionic account says US assets were simply over-owned and that the resulting (often unhedged) exposure’s in the process of being risk-managed.

“Despite the sanguine equities vibe that’s gaining steam, the USD, although no longer in freefall, can’t find big demand or hold bounces and hedging remains utterly tilted towards further downside,” Nomura’s Charlie McElligott wrote Thursday.

The figure above shows one-month riskies for the Bloomberg Dollar Index looking back nearly 15 years. Consider that some historical context for the pervasiveness of bearish sentiment as it currently exists.

Charlie spoke to what I’ll call the “pure markets” explanation for the dollar’s inability to find its footing.

“[It’s] just more of the same ongoing ‘waves of unwind’ from prior over-ownership of USD assets during the ‘US exceptionalism’ era more so than the ‘doomsday’ FX reserve rebalancing story,” he said.

The figures (click to enlarge, as always) give you some idea as to how this is showing up in the flows data. I mentioned the Taiwan-domiciled outflows earlier this week. The right-most figure underscores the point.

While grand narratives — i.e., the melodrama I alluded to above — are important, it’s best in the near-term, McElligott wrote, to simply “follow the money flows and fund allocations.”

“Investors who’ve ‘over-owned’ USD assets for over a decade, and especially those [who were] currency un-hedged or under-hedged, had a great ‘heads I win, tails you lose’ setup for a long time,” Charlie went on. Now, everyone’s “dealing with the double whammy on the reversal lower in both the assets and the currency over-indexing.” In other words: The assets sold off and the currency did too.

As for the big-picture de-dollarization narrative, McElligott says he’s skeptical if for no other reason than “those entities” — i.e., reserve managers — simply can’t “move that quickly,” and even if they could, wouldn’t be especially excited about “shooting themselves in the face by selling USTs to their own” detriment, particularly given the “ongoing lack of liquidity” and a dearth of “truly viable alternatives.”