According to BNY’s Geoff Yu, the US Dollar has experienced significant buying pressure throughout May, driven by strong US equity performance and a resurgence of 'U.S. exceptionalism' among global asset allocators [1]. Yu notes that risk sentiment is ending the month on a strong note, with gains primarily concentrated in AI and semiconductor sectors, making the dollar the best-bought currency among tracked majors [1]. As a result, asset allocators are now heavily exposed to the greenback, prompting recommendations for some reduction or hedging of USD positions at month-end [1].
Yu highlights that while the macro fundamentals supporting recent flows are likely to persist, and Fed expectations remain a key driver for dollar exposures, the current level of dollar positioning appears overstretched based on equities alone [1]. He points out that the only other notable equity-based rebalancing signal is in the Canadian dollar (CAD), where trends are moving in the opposite direction [1].
In the fixed income space, significant steepening across key G10 markets due to rising inflation expectations has generated more rebalancing signals, with both USD and CAD showing net selling and buying signals, respectively. However, the dollar’s fixed income-based selling signal is weaker, as poor bond performance has offset some of the dollar purchases [1].
Looking ahead, Yu suggests that the tipping point for the dollar will occur when Fed tightening or broader tightening in US financial conditions is no longer supportive of equity performance. For now, the market views this scenario as a tail risk, implying that dollar exposures may continue to rise if Fed expectations remain hawkish or neutral [1].
CONCLUSION
BNY’s analysis indicates that while the US Dollar remains strongly supported by robust equity performance and persistent macro fundamentals, current exposures are stretched and may prompt rebalancing at month-end. Market participants are advised to monitor Fed expectations and US financial conditions, as a shift in these factors could alter the dollar’s trajectory.