This is one of the developments that no one would have bet on at the beginning of the year: the decline of the dollar. The dollar index has fallen 9% YTD.
Sell the dollar
This was a move that was completely unexpected a few months ago. Let's remember that at the end of last year, in the wake of Donald Trump's election, the rise of the dollar was a consensus bet. Strong growth and the impact of tariffs were expected to lead the Fed to maintain high interest rates and therefore cause the dollar to rise.
Now, the uncertainty generated by tariffs and the slowdown in US growth have produced the opposite result: the dollar has fallen and experienced its worst half-year since 1991.
Fund managers have therefore completely changed their view on the dollar. So much so that the dollar's decline has become the "most crowded trade." This is revealed in the latest edition of Bank of America's Fund Manager Survey, the benchmark survey of fund managers.
Source: Bank of America
And buy the euro
On the other hand, investors are much more positive about the euro. According to the same Bank of America survey, overexposure to the euro is at its highest since January 2005, and exposure to European equities is at its highest in five years.
Since the beginning of the year, investors have therefore repositioned themselves in Europe, which had been largely neglected in recent years. The uncertainty created by Donald Trump on the one hand, and Germany's fiscal stimulus and rising military budgets in Europe on the other, explain this renewed interest.
However, the resulting rise in the eurodollar is beginning to worry the ECB. At the beginning of the month, Vice-President Luis de Guindos said that 1.20 was a critical threshold for the Frankfurt-based institution.
After a sharp rise in the first half of the year, it is nevertheless interesting to note that the eurodollar is stabilizing. In the markets, it is often when a trade becomes too consensual that it ends up reversing.
"Losing a major global war"
In principle, the Trump administration wants to weaken the dollar, arguing that it is overvalued and weighing on the competitiveness of US companies.
But as we have already explained, there is a difference between a decline in the dollar and a loss of status for the dollar.
The United States benefits greatly from being the world's reserve currency. And it has no intention of giving that up. Last week, during a meeting with members of his cabinet, Donald Trump warned against efforts by BRICS countries to weaken the dollar.
This threat is comparable to losing a "major world war" for the US president. "The dollar is king. We're going to keep it that way," he said, adding that if the dollar lost its status, "we would no longer be the same country."
