The direction of foreign exchange trading has changed! The halo of the US dollar as a safe haven is fading, and expectations of depreciation are regaining control of the market.

As the United States and Iran reached a temporary ceasefire agreement, weakening the safe-haven demand that had supported the US dollar index during the ongoing Middle East conflicts, international investors are increasing their hedging against the risk of a dollar decline. With the retreat of funds seeking safety in the US dollar, the market is returning to the grand narrative of the end of "American market exceptionalism", and global funds are restarting the script of shorting the US dollar. Just before global investors increased their dollar hedging ratio to a two-year high, a measure of cross-currency basis showed that in recent days, the additional costs that investors need to pay or receive when obtaining dollars in overseas markets, rather than in the US, have continued to decline. This indicates that the market demand for the US dollar is steadily weakening. According to statistics, the global investors' hedging ratio for the US dollar surged to 63% on April 10, marking the highest level since the same month in 2024. This latest data comes from Lee Ferridge, a senior foreign exchange strategist at State Street, one of the world's largest foreign exchange trading custodian banks. Since the end of February, when the US and Israel began military strikes against Iran, these indicators had quickly moved in favor of the US dollar meaning that as global financial markets favored risk during the escalating conflicts in the Middle East, there was a surge in demand for US dollar funding. The strategic team at Nomura Securities believes that if the ceasefire can be maintained and eventually lead to a permanent easing of hostilities, a long-term trend of de-dollarization due to factors such as unpredictable US policy and long-term deterioration of the fiscal deficit, leading to widespread divestment from US dollar-denominated assets could reappear. From war hedging to restarting the shorts, could the US dollar rebound just be temporary? One of the benchmark indices measuring the strength of the US dollar, the Bloomberg Dollar Spot Index, was almost flat on Wednesday after seven consecutive days of decline. The index is now almost back to the levels of February 27, the day before the outbreak of the latest round of Middle East geopolitical conflict. As a traditional core sovereign safe-haven currency during times of geopolitical and economic turmoil, the US dollar was one of the major beneficiaries during this round of Middle East geopolitical conflict and recorded its largest monthly increase since July in March. However, as peace negotiations between the US and Iran continue to intensify, the statistics from State Street show that market hedging activities for the US dollar are also increasing, indicating that investors are turning back to the core forex strategy viewpoint of shorting the US dollar that prevailed before the conflict. The surge in funds hedging US assets and the recent weakening of the US dollar. Ferridge said, "Investors and professional traders who missed the opportunity to hedge the US dollar in 2025 do not want to miss it again. It is a great time to start building mid-term short positions in the US dollar." In 2025, the theme of forex trading to hedge against US dollar depreciation losses was at the forefront. At that time, US President Donald Trump's extensive global aggressive tariff measures caused panic among investors holding US dollar-denominated assets and led to the US dollar index recording its worst annual performance in eight years. Although investors did not significantly withdraw from all US assets, they turned to various derivative instruments that could hedge against a decline in the US dollar. One year ago, on April 2, 2025, Trump appeared in the White House Rose Garden to announce one of his most iconic policies of his second term. This US president unveiled a long list of tariffs divided by country and called it his "Liberation Day" global tariff trade policy a move that sparked panic and volatility in global financial markets. The highly anticipated tariff list included high tariffs on imports from many trading partners, including 34% on Chinese goods, 20% on European goods, and 46% on Vietnamese goods. The subsequent record-level market sell-off swept through various types of global assets including US stocks, US bonds, and the US dollar leading to what later became known as the end of "American market exceptionalism" and the theme of "Sell America" trading. However, this year, the market was caught off guard by the Middle East conflicts, as many traders had placed significant bets on a weakening US dollar index at the beginning of the year. Now, forex strategists are beginning to reassess the risks faced by the US dollar, such as the possibility of the Fed cutting interest rates this year and the market starting to anticipate some central banks raising rates. George Saravelos, the global head of forex strategy at Deutsche Bank, wrote in a report on Tuesday, "The various conditions for re-shortening the US dollar are gradually falling into place." Ron Temple, a senior market strategist at the global asset management giant Lazards, said that 2025 marked the formal beginning of the end of "American market exceptionalism" and that as global investors reassess US assets, the continued and long-term decline of the US dollar and the continuous selling of US bonds by international funds would be significant milestone events. Ron Temple's future outlook on investment strategies often sparks discussions in financial markets. He accurately predicted the timing of the Bank of Japan raising interest rates in 2024 and successfully predicted that emerging market stocks would significantly outperform US and developed market stocks in 2025. As war hedging demand fades, expectations of a US dollar depreciation before the war dominate The latest core data and mainstream macro strategies are generally leaning towards the US dollar returning to a trajectory of depreciation and weakness before the conflict. If the market continues to strengthen its pricing for a more lasting ceasefire between the US and Iran and Lebanon, the overall direction of forex trading strategies is indeed increasingly pointing towards the US dollar returning to a trajectory of depreciation and long-term weakness, which also means that "war-time hedging demand is completely retreating, and expectations of depreciation before the war are taking over." The most direct evidence is that State Street's compilation of global investors' hedging ratios for the US dollar has risen to 63%, the highest since April 2024; meanwhile, the US dollar has essentially given back most of its gains from the Iran conflict, with another benchmark US dollar index (DXY) falling from its wartime high of 100.64 to about 98 currently, only slightly higher than before the conflict by about 0.5%. This indicates that as investors become increasingly optimistic about diplomatic progress between the US and Iran, the market is returning the "risk premium during wartime" and trading once again on the core theme of a more bearish US dollar before the conflict. From a macrological standpoint, the reasons for the US dollar's weakness are coming back together. If ceasefire expectations steadily rise, risk aversion wanes, and the market starts to bet on the Fed ultimately moving towards an easing monetary policy, all these factors are indeed pushing the US dollar towards a more weaker medium-term direction, with George Saravelos, a senior strategist at Deutsche Bank, even reintroducing the framework of "re-shortening the US dollar." Former US Treasury Secretary and former Fed Chair Janet Yellen explicitly stated this week that in the context of widespread supply shocks caused by the Iran conflict and rising inflation pressures, she still believes that a rate cut is possible later this year; this means that even with the negative impact of high oil prices, the Fed may not completely close the door to easing measures this year.