US President Trump's tariff threat boosted the US dollar again last week, but more and more investors are betting on a decline in the dollar as there are signs that the US economy is cooling down and concerns that the trade war will further weaken the US economy.

The number of short positions in the US dollar is increasing, including asset management companies Invesco and Columbia Threadneedle, as well as hedge fund Mount Lucas Management. On Wall Street, Morgan Stanley and Societe Generale have warned clients that long dollar trading is overcrowded and may not last.

They are ignoring the daily fluctuations caused by tariff declarations, and as they see it, the narrative around the US dollar will only become increasingly bleak. Import tariffs may reignite inflation and keep interest rates high, a prospect that has not provided support for the US economy. Now people are concerned that all the uncertainty surrounding tariffs may undermine the economy that is already showing signs of cooling down.

As a result, market expectations for the Federal Reserve to cut interest rates have intensified, weakening the attractiveness of the US dollar. As investors contemplate Trump's domestic and foreign policies, including cutting federal spending and undermining the peace agreement between Russia and Ukraine, the halo of US economic exceptionalism (which supported the 7.1% surge in the US dollar last quarter) is diminishing.

Kit Juckes, head of foreign exchange strategy at Societe Generale in London, said, "I don't think he can make the US dollar rise too much because it's really too expensive. But can he lower it a bit? He definitely can, if he damages the US economy

The world's major reserve currency, the US dollar, is now nearly 2% lower than the post election peak reached before Trump's inauguration, and the wave of risk appetite during this period has also pushed up US stock and bond yields.

Image: Short bets on the US dollar may peak

The situation last week fully illustrates the danger of shorting the US dollar in the current environment. After Trump announced that a 25% tariff on Mexico and Canada would take effect on March 4th, the US dollar surged last Thursday, weakening its decline in February. He also stated that an additional 10% tariff will be imposed on imported goods from major Asian countries.

Last Friday, US President Trump clashed fiercely with Ukrainian President, leading to the breakdown of a peace agreement with Russia and a potential agreement on a key mineral, and the US dollar continued to rise. US Treasury Secretary Scott Bessent reiterated that tariffs could bring substantial revenue.