As Donald Trump starts his second term as U.S. president, currency speculators are giving the dollar their strongest backing since before he first took office. The key question now is whether this signals more strength for the “mighty dollar” or if it marks the peak of its current cycle.
The dollar has seen a strong rally since late September, driven by bets on a stronger U.S. economy, sustained “higher for longer” interest rates, and a Trump victory. In the last three and a half months, investors have reversed a leveraged net short dollar position worth around $15 billion into a leveraged net long position exceeding $35 billion—the biggest “long” since January 2016.
Simultaneously, the dollar index, a measure of the greenback’s value against a basket of major currencies, has risen 10%, reaching its highest level in over two years. The dollar hit multi-year peaks against the British pound, Canadian dollar, and record highs against emerging market currencies like the Brazilian real and Indian rupee.
With Trump’s second term now underway, the dollar index is approximately 20% higher than its average over the last 25 years and at levels not seen since the 1980s. However, some analysts are warning that the dollar may be “getting a little bit ahead of itself.”
Analysts at Morgan Stanley, for example, have turned bearish on the dollar, recommending selling it against the euro, pound, and yen. They believe that much of the economic strength that has fueled the dollar’s recent rise is already priced in. They also caution that U.S. Treasury yields have likely topped out, the “U.S. exceptionalism” narrative is losing momentum, and that optimism about Trump’s dollar-friendly tariffs may be overstated.
Their analysts argue that the risks now favor dollar weakness, particularly as investor positioning becomes overly one-sided. As Morgan Stanley’s FX strategists noted, “We think the asymmetric risk clearly favors dollar weakness alongside lower yields.”
Not all analysts share this view. Goldman Sachs recently upgraded its bullish dollar outlook, citing continued U.S. economic outperformance, supportive Treasury yields, and the belief that the impact of Trump’s tariffs has not yet been fully priced in.
However, given the stretched dollar positions, a shift in sentiment could trigger a significant drop. On Monday, a Trump administration official stated that tariffs would not be imposed immediately on U.S. trading partners, causing the dollar to fall more than 1%—its worst performance since August.
The outlook for the dollar is uncertain, with market positioning and policy expectations key drivers of future movements.
