Trump’s Tariffs: Bearish or Bullish for the Dollar? Dollar Bulls Crack for the First Time

TradingKey — Expectations of Donald Trump’s potential return to the White House initially reignited a "Trump trade" frenzy, including a stronger dollar. However, as Trump’s tariff policies become increasingly erratic and fears of a U.S. recession mount, dollar bulls are turning bearish.

According to CFTC, as of March 18, speculative traders — including hedge funds, asset managers, and others — have placed $932 million in bets against the dollar, marking their first net bearish position since Trump’s presidential election victory in November.

Earlier this year, bullish bets on the dollar peaked at $34 billion. Analysts at Jefferies noted that the dollar’s rally was overhyped at the start of 2024, while Morgan Stanley and Société Générale warned that long-dollar positions had become overcrowded and unsustainable.

Some argue that the "Trump trade" has now fully reversed. Trump’s chaotic rollout of tariff policies has injected uncertainty, shifting market perceptions of his agenda from economically stimulative to potentially restrictive — altering expectations for growth, inflation, and monetary policy.

Economists initially predicted that Trump’s tariffs would boost U.S. inflation, limit the Federal Reserve’s ability to cut rates, and — when combined with tax cuts — support continued dollar strength. Now, however, his ever-shifting tariff stance, coupled with a string of weak economic indicators,  have stoked recession fears weighing on the greenback.

Despite the uncertainty, analysts at Capital Economics maintain that while the U.S. government’s next steps remain unclear, their base case still assumes tariff hikes followed by a rebound in the dollar.

Year-to-date, the U.S. Dollar Index (DXY) has weakened for three consecutive months, falling from a January high of 110 to around 104.