The dollar rebound meets resistance, with much skepticism in the options market.

The dollar gave back Monday's gains, as traders do not believe that the surge seen amid easing tensions in US-China trade will last for a long time. A measure of the dollar's strength weakened by 0.2%, as positions in the options market continued to show bearish sentiment towards the dollar. Data from the Depository Trust & Clearing Corporation showed that short bets on the dollar this week totaled around $61 billion nominal value, exceeding the $55 billion in bullish bets. As the US and China agreed to temporarily lower tariffs, the dollar had its best day since the US presidential election on Monday, rising by 1%. This boosted hopes of the world's largest economy avoiding a recession and led traders to reduce their bets on a Fed rate cut. Kristoffer Kjaer Lomholt, head of FX and Corporate Research at Danske Bank A/S, wrote in a client report that this rally was "completely due to the lifting of the liberation day trades." According to forex traders familiar with the transactions, hedge funds have cut back on their short dollar positions as the market lacks new demand for bullish bets. Progress in US-China trade talks brought optimism to the market, impacting traditional safe-haven currencies like the yen and Swiss franc the most, followed by bearish bets on the pound. In contrast, options on the euro, yuan, and Norwegian krone against the dollar saw significant bias, with about two-thirds of trades betting on further dollar weakness. However, this optimism had faded by Tuesday, with many institutions reiterating their view that the dollar will continue to decline. George Saravelos, global head of FX strategy at Deutsche Bank, stated in an interview that despite a more "moderate" US policy, real money and central banks are still cautious of the "concentration risk" in US assets. Analysts at Nordea and ABN Amro also expressed that despite the recent dollar rebound, they foresee a long-term decline, and have revised their forecasts for the euro and yuan exchange rates upwards. Options trading activity picked up on Monday but remained relatively subdued. It was about 10% higher than the three-month average but still 30-35% lower than levels seen during significant news events such as Germany's debt brake suspension or the announcement of retaliatory tariffs by the US on April 2. Thierry Wizman and Gareth Berry from Macquarie wrote: "Given the damage caused by events in April, the perception of the US as a 'fully trusted and creditworthy' counterpart will not fully recover quickly. This will limit the dollar's gains, and this trend has existed even before events in April unfolded." The so-called risk-reversal index, reflecting the difference in demand between bullish and bearish options, still shows long-term bearish sentiment for the dollar, though confidence is slightly lower than last week. Elias Haddad, forex strategist at Brown Brothers Harriman & Co, noted: "The US's protectionist trade policy increases the risk of the US economy entering stagflation. Therefore, we expect the dollar to face new downward pressure."