Dollar: Devaluation Concerns Meet Historic Skepticism — MUFG

The U.S. dollar index, after a modest rebound, is currently trading near 99.04, showing a consolidation pattern. Analysts Derek Halpenny and Abdul-Ahad Lockhart at Mitsubishi UFJ Financial Group note that while discussions over U.S. fiscal sustainability, Treasury buyback operations, and the outlook for dollar depreciation have intensified, this devaluation narrative is encountering historic skepticism.

**Devaluation Narrative Faces Headwinds**

The analysts argue that recent market expectations of potential Treasury measures to curb rising long-term yields have reignited discussions about structural dollar depreciation. However, this view runs counter to historical experience. Over the past decades, whenever global risk events erupted or economic uncertainty intensified, the dollar often drew safe-haven buying support due to its global reserve currency status. Currently, market bets on one-way dollar weakness may underestimate the resilience of its safe-haven attributes during turbulent periods.

**Policy Outlook Adds Uncertainty**

The Federal Reserve's policy path is another key variable influencing the dollar's trajectory. Previously, markets had priced in expectations of a potential Fed pivot toward easing, driving a dollar pullback. But MUFG cautions that if the Fed maintains a hawkish stance on fighting inflation, or if U.S. economic data shows stronger-than-expected resilience, this would limit the dollar's downside. The analysts emphasize that one-sided bets on dollar depreciation have historically been repeatedly upended by Fed policy shifts or external shocks.

**Market Sentiment vs. Historical Lessons**

Overall, MUFG's view highlights the divergence between current market sentiment and historical patterns. While structural factors such as fiscal deficits and trade imbalances exert long-term pressure on the dollar, in the near term, building large short positions based on these factors may overlook the dollar's "safe haven" role during crises. The analysts remind that absent a clear catalyst, the dollar index is more likely to remain range-bound rather than embark on a one-way depreciation trend.