The note argues that the recent strength in the U.S. dollar is being driven by a positive terms-of-trade shock alongside already-high trade-weighted USD holdings, which reduces the need for portfolio rebalancing. As a result, it sets a high bar for technical selling pressure to meaningfully push the dollar lower in the current environment.
It also suggests the U.S. dollar is unlikely to be a decisive input into today’s Federal Open Market Committee decision. At the same time, it frames the last two months as a net easing in financial conditions, largely because rising conflict has increased demand for U.S. dollar liquidity.
Terms Of Trade And Positioning
Earlier worries around U.S. competitiveness are described as having eased in the near term because the terms-of-trade boost improves the U.S. external position. The note does acknowledge some flow leakage out of USD and into alternatives like the Canadian dollar and Chinese yuan.
Even with these offsets, the dollar’s strong performance versus the euro, Japanese yen, and Mexican peso keeps trade-weighted USD ownership elevated. However, the level is characterized as not extreme enough to trigger major downside rebalancing flows.
From a trading perspective, the overall message is that the dollar’s outlook remains constructive, and that strategies aligned with continued upside (for example, DXY call options) may be more logical than positioning for a near-term reversal. The rationale given is continued policy divergence, with Q1 2026 U.S. GDP growth at 2.8% and sticky core inflation reducing the Fed’s incentive to cut rates.
Relative Value Trade Setups
On relative value, the euro is presented as a reasonable funding short versus the dollar, with defined-risk structures like selling EUR/USD call spreads. The argument leans on weaker euro-area data (German IFO at 98.5) and ECB signaling that a rate cut by July 2026 is plausible, in contrast to a hawkish Fed hold.
The yen is described as particularly exposed, making long USD/JPY attractive for higher risk tolerance, because the Bank of Japan is still committed to ultra-loose policy and a near-zero rate, widening the U.S.–Japan yield gap. The note also flags that while the Canadian dollar has attracted some support (helped by WTI above $85), broader weakness elsewhere (including the Mexican peso) reinforces the idea that betting on a sharp dollar downturn via options is a lower-probability trade in the coming weeks.
