Dollar Eyes More Losses After Biggest Monthly Drop Since 2022

The dollar is heading for its worst month since 2022 after global investors cut back on US assets, with options markets still flashing warning signals.

A gauge of the greenback is down around 4% in April, the result of a selloff in both US stocks and Treasuries as President Donald Trump's chaotic trade tariff rollout rocked global markets. Options show sentiment over the next year is the most negative on the dollar since 2020, creating strong demand for protection from further losses.

This fallout from the tariff turmoil has got investors questioning whether the dollar — the world's reserve currency — is still the safe haven it used to be. That argument was given impetus by the greenback losing further ground this week, even when bank models pointed to end-month buying by companies and asset managers to rebalance their exposure.

“Market action in April looks less like a ‘normal deleveraging' and more like a quiet exodus of domestic and foreign real money from the US,” said Kevin Thozet, a member of the investment committee at Carmignac.

The mayhem in April has exposed the risks that come with pouring so much money into dollar assets. The end of the month is when asset managers take stock and adjust holdings based on performance, while exporters manage their exposure, triggering significant flows in the $7.5 trillion-a-day currency market.

This time around, with US assets underperforming, they were expected to purchase dollars. Models from Barclays Plc and Credit Agricole SA had flagged the likelihood of dollar buying.

The flows on Monday — a key day given it can take two days to settle deals — were positive, according to market participants, with one pointing to corporate buying through their bank alone of around $5 billion.

Even so, the dollar still fell 0.5% on Monday and is heading for a loss this week, suggesting any end-month buying has been drowned out by sellers. Under typical conditions, such flows might have lifted the greenback. Their limited impact this time suggests a possible shift in market behavior.

“There could be broader, structural forces at work here that longer-term investors should be aware of — specifically whether we are looking at the end of US exceptionalism or a general ‘de-dollarization' theme in markets,” said David Chao, global market strategist at Invesco Asset Management, which oversees more than $1.8 trillion in assets.

Up for Debate

While many banks have models for how end-month flows might affect currencies, market participants say these have become less reliable since the pandemic.

Demand for dollars from US companies could still trigger a “snap back” in the currency in the coming weeks, though gauging when and at what level this might happen was “more of an art rather than a science,” said Francesca Fornasari, head of currency solutions at asset manager Insight Investment.

“Usually, when you've had a big move lower in the dollar, you would have expected that US corporates would come in and actually start to buy some dollars. Based on the numbers that we look at, that hasn't really happened,” she said. “You can understand why it hasn't happened because the move in the dollar has been so sharp.”

Some analysts warn it's still early days to judge the outlook for the dollar on just a few weeks of selling, with concerns about its status emerging every few years and usually being batted away by a resurgence.

For investors looking for protection against the uncertainty, it's become more expensive to hedge a continued slide. Interest in how to position on the dollar from clients surged into the month-end, according to Vishnu Varathan, head of economics and strategy at Mizuho Bank Ltd in Singapore.

“Month-end flows can inflict real pain if you're wrong footed on the currency,” he said. “De-dollarization is a longer-term trend, and this could potentially provide another bit of information to markets on where it's headed. How clear it will be though as a longer term indicator is up for debate.”