Did Trump's clever move backfire? Wall Street warns that the US dollar faces significant downside risks, and if forced intervention weakens it, the cost is "too high"

Wall Street insiders are issuing warnings about the increasingly serious downside risks for the US dollar, and President Trump's repeated attacks on the strong dollar may backfire, as any forced intervention by the US government to weaken the dollar in the foreign exchange market would come at a huge cost.

Nearly two months ago, Trump criticized the strong dollar in a media interview, stating that the US faces a "serious currency problem," and the exchange rate of the dollar against the yen and other currencies is "incredible," with the strong dollar bringing a "heavy burden" to the US. Barclays strategists in a report released on Monday predicted that if Trump is re-elected as president and returns to the White House, any measures taken by the US government to intentionally weaken the dollar would face significant obstacles, as the cost of unilateral exchange rate intervention is "excessively high."

These strategists believe that to lower the dollar, tightening fiscal policy and Plaza Accord 2.0 are low-cost options, but they require significant coordination and have a low likelihood of success. Their report states:

"In many ways, fiscal tightening is the 'best' way to weaken the dollar: it can suppress inflation and enhance the long-term credibility of the federal government. Unfortunately, this is a politically unpopular choice, and currently neither of the two presidential candidates (Trump and Harris) are campaigning on such a platform."

If Trump chooses other options, such as requiring the Federal Reserve to cooperate and engaging in unilateral intervention, whether through sterilized or non-sterilized selling of dollars, both approaches are "too costly and not very feasible."

"If the policies proposed by Trump are implemented, the Federal Reserve eventually implements loose monetary policy, further expands fiscal policy without a negative output gap, it may ultimately exacerbate inflation and put the expected stability at risk."

Barclays also expects that the proposed 10% universal tariff will support a 3% to 4% increase in the dollar.

In fact, even if Trump allows the dollar to fluctuate freely after taking office, the dollar may still weaken. Bloomberg's macro strategist Simon White recently analyzed that the "significant" downside risks for the dollar continue to intensify. One major impact is that the real yield curve continues to invert, hindering capital inflows into the US and keeping the dollar on a downward trend.

The Federal Reserve is expected to begin cutting interest rates at this week's meeting; the market is still debating whether to cut by 25 basis points or 50 basis points. While direct interest rate differentials are important for currency performance, it is empirically judged that the yield curve, especially the real yield curve, has a stronger leading relationship with the dollar.

White points out that the US real yield curve further inverting will lead to a weakening dollar in the next 6 to 9 months. As inflation declines, causing a rise in 3-month real interest rates, while 10-year real interest rates continue to decline, the yield curve is inverting.

At the same time, the support for the dollar from marginal demand for the dollar is declining. This demand comes from non-US individuals outside the US who purchase US assets through foreign exchange hedging. Due to the high short-term interest rates in the US, hedging costs are rising, making hedging costs less attractive compared to US long-term yields, thus affecting this demand.

White states that the US Treasury's TIC report data provides a detailed presentation of the flow of funds into US stocks and fixed income products. Among them, the flow of funds into bonds far exceeds that of stocks He found that the flow of funds in bonds often leads the performance of the US dollar, while stocks have no constant relationship with the US dollar. Based on the calculation of the annual total change with a term of 12 months, the inflow of funds into bonds has been declining, indicating a weak US dollar.

From a macro perspective, the global economic growth situation is positive for the weakening of the US dollar. When the economic growth of other developed markets is stronger than that of the United States, the US dollar often performs poorly. Currently, the performance of the US manufacturing PMI is inferior to that of Europe, the UK, Japan, and other places, which often signals a weakening US dollar.

In terms of speculation, the Commodity Futures Trading Commission (CFTC) statistics on traders' positions (COT) show that speculators are currently net short on the US dollar, but the short positions have not reached a level that reflects a significant risk of short covering. The net short positions mainly target the US dollar against other developed market currencies, while the long and short positions of the US dollar against emerging market currencies are roughly balanced, and have not yet turned net short.

On Monday this week, after senior reporters from The Wall Street Journal and the Financial Times suggested the possibility of a 50 basis point rate cut by the Fed last week, the ICE US Dollar Index further weakened. Intraday, it fell below 100.60 to hit a new low in over a week, and the US dollar against the Japanese yen fell to its lowest level since July last year. White pointed out that the US dollar index is approaching 100.00, and if it breaks below this key level, a larger decline may occur