BBH says the US Dollar can gain short-term support from safe-haven demand and higher needs for Dollar funding during market stress. It notes that demand for short-term USD funding often rises when markets are under pressure. The bank links this to the Dollar’s central role in trade invoicing, cross-border lending, global bond issuance, and FX reserves. It adds that, in stress periods, overseas market participants seek Dollars to secure liquidity, roll over debt, and meet funding needs.

Short Term Dollar Support

BBH maintains a longer-term bearish stance on the Dollar, citing weaker confidence in US trade and security policy. It also points to worsening US fiscal credibility and greater politicisation of the Federal Reserve. It reports that the US Trade Representative’s office initiated Section 301 of the Trade Act to bypass a legal constraint tied to a recent Supreme Court tariff ruling. The investigations cover China, the European Union, Singapore, Switzerland, Norway, Indonesia, Malaysia, Cambodia, Thailand, Korea, Vietnam, Taiwan, Bangladesh, Mexico, Japan, and India. In the immediate term, we expect the US Dollar to find support from haven demand as market stress increases. The recent spike in the VIX above 22, coupled with widening credit spreads, points to a scramble for dollar liquidity to service short-term debt. Traders should consider short-dated call options on the DXY to capitalize on this flight to safety. This environment suggests that pairs like EUR/USD and AUD/USD may face downward pressure in the coming weeks. We see the Dollar Index, which recently pushed past the 105.50 level, testing further highs as global participants secure funding. Using option spreads can be an effective way to manage the higher costs associated with rising implied volatility.

Long Term Dollar Risks

However, we must not lose sight of the structural weaknesses building against the dollar for the longer term. Fading international confidence in US trade policy, along with questions about our own fiscal health and central bank independence, creates significant headwinds. These factors suggest any near-term strength could be an opportunity to position for future downside. Looking back at the data from 2025, we saw the US budget deficit expand beyond forecasts, pushing the national debt-to-GDP ratio to a record 126% last quarter. The recent move to bypass the Supreme Court’s tariff ruling with new Section 301 investigations against major trading partners only reinforces the perception of erratic trade policy. These are not temporary issues but deep-seated trends that will likely weigh on the dollar’s value. For those with a longer horizon, this period of dollar strength may be an ideal time to start building bearish positions. Buying longer-dated put options on the dollar, perhaps with six to nine-month expiries, could prove beneficial as structural concerns eventually overtake the current demand for safety. We should be watching for any sign that the immediate funding stress is easing as a signal that the underlying bearish trend may be ready to resume. Create your live VT Markets account and start trading now.

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