USD: Still downside risks – ING

US equities and bonds had a good Monday, but considering the width of Trump's announced exemptions from China's tariffs, the move is well short of exceptional. Markets retain a substantial risk premium attached to US assets, including the dollar. That ranges between 2% and 5% across different G10 currencies, in our estimates, although the recent instability in traditional correlations and unnaturally high FX volatility means those deviations shouldn’t be taken at face value, ING's FX analyst Francesco Pesole notes.

Markets remain heavily bearish on the USD

"Anyway, the option market is sending clear signals that markets remain heavily bearish on the dollar, and price action on Monday suggests investors are still minded to sell USD in the rallies. The rationale here is that even if we have seen the worst in US market dysfunctionality, a deterioration of US data is likely on the way, and the damage dealt by "chaotic" trade policy decisions won't be unwound quickly."

"Yesterday, Treasury Secretary Scott Bessent rejected the possibility that foreign nations (presumably China) are dumping US Treasuries. He attributed bond losses to deleveraging and while affirming the Treasury has many tools to support the market, we are far from those levels."

"The balance of risks remains tilted to the downside for the dollar, regardless of broad stabilisation in the Treasury market, in our view. The data calendar includes the Empire Manufacturing index today, which is expected to rebound while staying in negative territory. Yesterday, we saw a 0.4% increase in NY Fed 1-year inflation expectations, although the survey dates back to three weeks. The more up-to-date University of Michigan survey showed a spike in inflation expectations to 6.7%, although the sample is rather small and could be politically biased."