US dollar hits 2-week low as traders get more bearish than ever ahead of G7 meeting

The dollar is falling way too fast. On Wednesday, the Bloomberg Dollar Spot Index dropped by 0.4%, logging its third straight day of losses and hitting its lowest point in two weeks.

Traders across the globe are watching the G7 meeting this week, expecting signs that President Donald Trump’s administration could be preparing to support a weaker dollar policy.

According to Bloomberg, market watchers believe the Oval is no longer committed to keeping the dollar strong, and investors are acting like it.

Katsunobu Kato, Japan’s Finance Minister, said last week he’s planning to speak directly with US Treasury Secretary Scott Bessent during the G7 about currency moves. The Japanese want clarity, and their concerns aren’t isolated either. South Korea already confirmed they held similar talks with the US earlier this month.

Dollar weakens further as US debt, tax cuts and downgrade pile on

There’s more pressure coming from Washington itself. Lawmakers are debating a $4.5 trillion tax cut package that Republicans want to stretch out over a decade. 

The current draft would already cause $3.8 trillion in revenue losses, and that’s got Wall Street staring at the ballooning US budget deficit with a mix of dread and disbelief.

That deficit problem just got worse. Moody’s Ratings stripped the US of its top credit grade last week, citing long-term growth in government debt and interest payments.

The dollar slumped against all ten of its Group-of-10 peers in the first trading session after the downgrade. Bonds and equities barely blinked, but FX traders took the hit personally.

“Rising fiscal concerns are fueling a combined rise in long-end US yields and dollar decline,” said Moh Siong Sim, an FX strategist at Bank of Singapore Ltd. He added that foreign investors are starting to back away from financing the US government’s twin deficits — the fiscal deficit and the trade gap. He said the process of cutting back exposure to American markets “is just getting started.”

In the options market, sentiment is breaking records in the wrong direction. One-year risk reversals on the Bloomberg Dollar Spot Index — which show how much more expensive it is to bet against the dollar than on it — fell to minus 28 basis points. That’s the lowest since Bloomberg began tracking the data in 2011, even worse than during the initial shock of the pandemic in 2020.

Traders go all in on bearish bets as losses widen in 2025

It’s not just about options. In the derivatives space, speculative traders are now holding $16.5 billion worth of short positions against the dollar, based on Commodity Futures Trading Commission figures through May 13 compiled by Bloomberg.

That’s near the most aggressive bearish stance since September 2024. Just five months ago, these traders were sitting on $31 billion in long positions. So why the flip? The market’s trust in Trump’s policy stability is evaporating. His back-and-forth tariff moves are shaking investor confidence.

Even though the US and China announced a temporary truce earlier this month, it hasn’t stopped the dollar bleeding. Bloomberg’s measure shows the dollar has already lost over 6% in 2025, the worst start to a year since the index launched nearly 20 years ago.

“The structural bearish dollar view is still around because the reprieve from trade and China issues is only temporary,” said Kathy Jones, chief fixed-income strategist at Charles Schwab & Co.

And Moody’s downgrade made things worse. The firm pointed to a decade-long rise in federal debt and surging interest costs as reasons for the cut. Markets responded by ditching the dollar, even if stocks and bonds mostly stayed put.

Some investors think the bearish mood is a bit much. With the Federal Reserve taking a more cautious approach and not rushing into policy changes, US bond yields might still hold some ground against international peers. But even those hoping for a bounce admit it won’t mean much if Washington doesn’t pull its fiscal act together… fast.