Growing expectations that the Federal Reserve will raise interest rates to curb inflation have weakened the so-called bear trade that gained momentum after Donald Trump took office.
Trump's trade policies and his criticism of the Federal Reserve's independence hurt the U.S. currency last year, pushing the dollar index to its worst level in eight years. Strong U.S. economic data and high consumer prices have led traders to expect a Fed rate hike of a quarter percentage point by the end of this year. This represents a reversal from earlier rate cut forecasts, which were swayed by the Middle East war and the subsequent surge in energy prices. "Rising real rates have put pressure on last year's bearish dollar trade, which was built on the assumption that a controlled Fed would do the White House's bidding," Turner wrote in today's note. "Confidence that the Fed will respond to the inflation shock has been a key driver of the dollar's recovery over the past month."
Bearish dollar trades are bets on the dollar's weakening as inflation erodes the currency's purchasing power and investors shift to assets and currencies considered more reliable stores of value.